13.4. Letting of Real Estate - Jurevičius, Bartkus ir partneriai
Transcription
13.4. Letting of Real Estate - Jurevičius, Bartkus ir partneriai
Lithuania 2 0 0 7 THE LITHUANIAN COMMERCIAL PROPERTY MARKET 2007 Lithuania Vilnius City Kaunas City Klaipėda City Šiauliai City Panevėžys City Contents Chapter 1 Introduction 7 Chapter 2 Executive Summary 8 Chapter 3 Geography and Population 9 Chapter 4 Major Cities of Lithuania 10 Chapter 5 Economic Overview 11 Chapter 6 Office Market 15 Chapter 7 Retail Market 21 Chapter 8 Warehouse/Industrial Market 30 Chapter 9 Hotel Market 33 Chapter 10 Investment Market 35 Chapter 11 SWOT Analysis of the Current Commercial Property Market 38 Chapter 12 KOBA Market Expectations 39 Chapter 13 Legal Environment 41 Chapter 14 Taxation of Real Estate 47 KOBA Company Profile 57 Jurevičius, Balčiūnas & Bartkus Profile 58 Chapter 1 Introduction The purpose of this report is to provide an overview of the current commercial property market in Lithuania. The information has been prepared using external data obtained from official Lithuanian institutions (Lithuanian Statistics Department, Lithuanian Development Agency, National Tourism Department), that of the leading commercial banks (Hansabankas, SEB Vilniaus bankas), the opinions of market participants, as well as the information and data of the real estate company KOBA and Professional Law Partnership Jurevičius, Balčiūnas & Bartkus. The information provided in this report is correct to the best of our knowledge as of 1 February 2007. The commercial property market in Lithuania continues to be in a dynamic phase and professional advice should be sought whenever investment decisions are being taken on Lithuanian real estate. The report is divided into 14 chapters, each of which can be read independently. Chapter 2 describes the general market situation. Chapter 3 gives an overview of the geography and population of Lithuania. Chapter 4 presents information about Lithuania’s five major cities. Chapter 5 describes Lithuania’s economic achievements and trends. Chapters 6 – 9 give an overview of the developments and trends in the office, retail, warehouse and hotels markets, as well as future movements in these segments. Chapter 10 describes recent events in the investment market in all commercial property market segments. Chapter 11 presents the strengths, weaknesses, opportunities and threats to the Lithuanian commercial property market. Chapter 12 gives an overview of KOBA’s expectations for the commercial property market segments. Chapter 13 is an overview of the legal environment for investment in commercial property. Chapter 14 presents an overview of taxation affecting the real estate sector. The Lithuanian Commercial Property Market 2007 has been prepared by KOBA together with Professional Law Partnership Jurevičius, Balčiūnas & Bartkus primarily for professional investors, leaseholders and developers taking an interest in the Lithuanian property market. NB! Limitation of liability The information contained in this overview is intended solely for general information purposes and shall not be treated as professional advice or legal opinion. Any copying, distribution or reprinting is allowed only with the written permission of real estate company KOBA and Professional Law Partnership Jurevičius, Balčiūnas & Bartkus. Copyright © 2007 KOBA Copyright © 2007 Jurevičius, Balčiūnas & Bartkus Chapter 2 Executive Summary The Lithuanian Commercial Property Market 2007 describes the expectations for the property market in economically promising Lithuania, a relatively small country with long-standing democratic traditions. After regaining independence, Lithuania introduced radical economic reforms, the result being a successful transition from a state-regulated to a market-based economy. Joining the EU and NATO even more added credibility to Lithuania as a country, which now has a thriving market economy operating in a stable, wellregulated framework. In 2006, GDP growth reached 7.4%. Relatively low interest rates combined with stable economic growth and high expectations upon EU accession initiated steady growth in both the commercial and residential real estate sectors. However, the time of numerous opportunities for low-risk development has already passed. The market is showing more signs of being mature, and competition among property owners and projects is increasing. The main trend describing the retail market today is spreading of shopping centres into secondary cities. Currently, in Vilnius, the Lithuanian capital city, total modern retail space has almost reached 500,000 sq. m. Still, the retail market is developing at a full speed, while existing shopping centres and high-street retail units continue to maintain zero or close to zero vacancy levels. This situation may change after three major shopping centre projects are completed in 2007-2008. Being the most developed commercial market segment in Vilnius and throughout Lithuania, the office market development has revived after a brief slowdown in 2005 and the first half of 2006. There is a significant number of projects in the pipeline for the coming years, most of them in Vilnius. There has also been a significant expansion of modern office space in Klaipėda, although development in Kaunas is not yet so active. At the beginning of 2007, vacancy levels are almost zero in existing business centres, indicating a shortage of high quality office premises. Bearing in mind that the total space coming in with pipeline projects exceeds 180,000 sq. m, it is likely that the imbalance in the office market will decline by the end of 2007. The industrial/warehouse market has seen relatively slower growth during the last few years, mainly because of specific requirements for these properties, which oblige developers and investors to develop projects only if they have pre-lease agreements, or purpose-built premises to order. There is also huge potential for older premises to be renovated and modernised for current use. Although the number of visitors arriving for both tourism and business purposes is growing, the supply of hotel services is not increasing at the same rate which should encourage developers to consider new projects. While this segment of the market is mainly under local ownership, more international hotel chains are expected to arrive on the Lithuanian hotel scene in the next few years. The stable and strong economic and political environment, together with increasing numbers of commercial property developments, makes this market interesting and promising for investors. A number of commercial property acquisitions were performed in 2006 (not only in the capital city, but also in secondary cities) and are foreseen for 2007. Moreover, 2006 showed that commercial property market has turned its attention to sale and lease-back transactions. Chapter 3 Geography and Population 3.1. Geography Lithuania is the largest country in the Baltic States. With an area of 65,300 sq. km, Lithuania is larger than Belgium, Denmark, the Netherlands and Switzerland. It borders Latvia in the north, Belarus in the southeast, Poland and Russia (Kaliningrad) in the southwest. Arable land accounts for 70% of the country’s lowlands, plains and hilly uplands. About 28% of the territory is forested. Lithuania’s 722 rivers, more than 2,800 lakes and 99 km of the Baltic Sea coastline are mostly devoted to recreation and the nature conservation. Climate type falls between maritime and continental. 3.2. Population The population of Lithuania is 3.39 million (4th quarter of 2006). This is 13,400 less than at the beginning of the year. The declining number of residents is related to international migration and natural population decrease. About 67% of the country’s people live in urban areas. A quarter of the population lives in the Vilnius County. Population density is 52 people/sq. km, the highest densities being in Vilnius (87 people/sq. km), Kaunas (84 people/ sq. km) and Klaipėda (73 people/ sq. km). The majority of the population (83.5%) is Lithuanian, with 6.7% Polish, 6.3% Russian and 3.5% others (predominantly Belarusian, Ukrainian and Latvian). Some 79% of the population are Roman Catholics. The official state language is Lithuanian which has its roots in Sanskrit and belongs to the Baltic family of Indo-European languages. Most of the population also speaks Russian, although English is becoming widespread. Chapter 4 Major Cities of Lithuania There are five major cities in Lithuania: Vilnius, Kaunas, Klaipėda, Šiauliai and Panevėžys. 4.1. Vilnius Being Lithuania’s capital and largest city, with a population of nearly 542,000, Vilnius is the centre of culture, politics and business, and attracts more than half of all foreign direct investment. All the main public and governmental institutions are located in Vilnius, making it a desirable place to locate one’s headquarters. The city has become the major engine of economic development in Lithuania, having the highest GDP level per capita and the fastest growth, which in turn, boost Vilnius’s appeal for business and cultural tourism. Unemployment levels in Vilnius are among the lowest in the country. Vilnius is developing in line with the city council’s planned vision for its strategic development up to 2015. This has been implemented to avoid some of the mistakes made in neighbouring capitals such as Riga and Tallinn. Vilnius’ Old Town is on the UNESCO World Cultural Heritage list. The city attracts a large number of tourists every year. 4.2. Kaunas Situated in a favourable strategic location in the central part of the country, with a population of almost 361,000 and well-developed infrastructure, Kaunas is a natural location for logistics facilities and industry. Located close to the Via Baltica highway, it also has a large cargo and passenger airport, only utilised by low-cost airlines. International interest in cheaper flights is very big and this may attract more tourists from other countries to Kaunas as well. Several education institutions are located in the city. The Kaunas Free Economic Zone has started operating and is expected to increase the number of development projects in the near future. 4.3. Klaipėda Situated on the west coast, Klaipėda is the ice-free port. Ferry lines link it with the other Baltic Sea cities. With a population of over 187,000, Klaipėda is a large, multimodal transport junction of sea, road and railway routes, connecting eastern and western industries and markets via the shortest possible means. The Klaipėda Free Economic Zone is actively operating, developing and attracting numerous foreign investors. 4.4. Šiauliai Šiauliai, with a population of 129,000, is a regional centre located in the northern part of Lithuania near the river Venta. Šiauliai is an important cultural and economic centre of northern Lithuania, and concentrates the region’s industry, with an actively developing services sector in parallel. The city’s largest exporters are manufacturers of bicycles, television sets and communication equipment, plastic bottles, furniture, leather and knitwear. 4.5. Panevėžys This city, with a population of over 115,000, is situated near the Via Baltica international highway and on the main rail route to Klaipėda. Panevėžys is famous for its electronics, glass, textile, furniture, construction and food industries. 10 Chapter 5 Economic Overview Lithuanian economic growth is stable and reached 7.4% over 2006, compared to the corresponding period of 2005. The Ministry of Finance forecasts 6.3% GDP growth for 2007, which strengthens confidence in the country’s continued strong and stable economic growth. Although inflation rates have risen above expected rates, temporarily closing the door to the Euro adoption, the Lithuanian economy can be complimented for lower than forecast unemployment rates and significant increases in salaries. The main economic indicators are examined in the sections below. 5.1. GDP According to the Lithuanian Statistics Department first estimate, GDP totalled LTL 81,6 billion (EUR 23,6 billion; at comparable prices) in 2006. During three quarters of 2006 the most rapid growth in value added was seen in construction (18.9%), financial services and real estate (9.4%), retail, hotels and restaurants, transport and communications (8.4%). During the third quarter of 2006, increasing income and borrowing (although interest rates have also risen) resulted in the continued growth of consumption expenditure. Total household consumption demonstrated a significant increase (14.0%), followed by the rise in gross fixed capital formation (10.2%). In the government sector, consumption expenditure rose by 7.9%. The input of various regions into national performance varies significantly. During the latter years the largest proportion of Lithuania’s GDP, more than one third, is produced in the Vilnius County, where the services sector has considerable weight (70% of the county’s GDP, whereas the national average is 60%). Kaunas County contributes about one fifth of the country’s GDP, while Klaipėda puts in one tenth. Growth of Lithuanian Gross Domestic Product 2000-2007, % 12% 10.3 8% 4% 6.6 6.9 2001 2002 7.3 7.6 7.4 2004 2005 2006 6.3 4.1 0% 2000 2003 2007 F Source: Lithuanian Statistics Department, Ministry of Finance, 2007 Stable GDP growth attests to the country’s attractiveness for investment, and validates the security and stability of the investment environment. This is very important for property market participants, as real estate investment is generally the long-term. 5.2. Inflation Inflation in 2005 and 2006 reached 3.0% and 3.8% respectively. Despite strong growth in wages and domestic consumption, the inflation level in Lithuania has mainly been driven by external forces. Average annual inflation in 2006 rose mainly because of increased prices for food, utilities and fuel. Significant increases in gas, electricity and fuel prices are expected at the beginning of 2007 and excise duties for tobacco products will be raised in March. Lithuania was planning to adopt the Euro from 1 January 2007, however, the inflation rate for 2006 was well above the reference value established by the Maastricht Treaty and the date of Euro adoption was postponed until 2010, by which time it is expected that the impact of the main inflation-driving factors will have diminished. Inflation in Lithuania, 2000-2007, % 5 4 3 2 1 0 -1 -2 2000 2001 2002 Source: Lithuanian Statistics Department, Ministry of Finance, 2007 2003 2004 2005 2006 2007 F 5.3. Unemployment According to the Labour Force Survey, which is an interview of persons, selected from the Population register by random sample method, results, the unemployment rate in the third quarter of 2006 was 5.7% and has come close to the structural unemployment rate. Since 2002, the overall trend in the unemployment rate has been downward and there is no expectation that it will change direction in the next few years. Unemployment Rate (Labour Force Survey Results), 2000-2006, % 20 15 10 5 0 2000 2001 Source: Lithuanian Statistics Department, 2007 2002 2003 2004 2005 2 0 0 6 III Q The above mentioned unemployment rate can be compared to that provided by Labour Exchange, i.e. level of registered unemployed persons, which as of 1 December 2006 was 3.3% of the population of working age, whereas a year earlier, that figure was 3.9%. As a result of increased emigration, the options for employers to hand-pick workers have decreased and the labour market is now having to take on employees whose age and qualification would have excluded them in earlier times. In some business sectors the lack of skilled employees has already reached a critical level. Among skilled workers, the most in-demand are construction specialists (carpenters, painters, welders, etc.) and dressmakers, also many vacancies have been registered in the manufacturing and transport sectors. The services sector (especially supermarkets and restaurants) is experiencing a shortage of non-qualified employees. In consequence, business people are clamouring for the liberalisation of the labour market and the simplification of procedures for issuing work-permits to non-Lithuanians. Decreasing unemployment has also boosted consumer spending power which, in turn, has created potential demand for more retail and leisure space. Combine this with attractive borrowing conditions, and it is not difficult to extrapolate the significant effect on the demand for real estate. 12 5.4. Salaries and Wages The average Lithuanian monthly salary increased from EUR 332.9 in 2004 to EUR 369.6 in 2005, or by 11%. As one would expect, the highest salaries are in Vilnius and the other major Lithuanian cities. Average salaries in Vilnius County reached EUR 430.7, which is 16.5% higher than the national average. In the third quarter of 2006, the average salary increased to EUR 478.9, an increase of 19.9% over the same period last year. The main drivers for such impressive rises are increases in monthly salaries and decreased income tax rates since July 2006. Proportional personal income tax was reduced from 33 to 27% and this has directly increased employees’ disposable income. Current plans to cut income tax further from 27 to 24% from 1 January 2008 would increase disposable income even more. Salary increases are particularly evident in those economic sectors where the labour deficit is the largest. Salaries are expected to continue increasing in the future until the difference between the Lithuanian and the EU averages diminishes. Of course, any growth in salaries is sustainable only as long as it is matched by productivity growth. SEB Vilnius Bank analysts forecast a 17% increase in salaries in 2006, followed by 15% and 13% in 2007 and 2008, respectively. Such optimistic prognoses for salary growth allow us to assume that consumer spending power will grow accordingly, and the desire to spend more money will create additional demand for retail and leisure space in particular. 5.5. FDI Over the past few years Lithuania has become a leading location for foreign investors and one of the region’s most competitive centres for sourcing manufacturing. The main reasons are a highly skilled, low-cost alternative to production in western Europe, along with a stable and strong production springboard to the huge markets in the east. In addition, impressive economic growth, a stable currency and a business-friendly legislative environment all combine to make Lithuania the premier investment location in the region. The Lithuanian economy is the largest and most diversified of the three Baltic States. During the last 50 years, intensive industrialisation introduced enterprises specialising in electronics, chemicals, machine tools, metal processing, wood products, construction materials and food processing. The light industry sector includes production of textiles, ready-to-wear clothing, furniture and household appliances. Cumulative FDI in Lithuania (EUR billion, beginning of year) 8% 6.9 7% 6% 4.7 5% 4% 3% 2.4 2.7 3.1 3.8 4 2003 2004 2% 1% 0% 2000 2001 2002 2005 2006 Source: Lithuanian Statistic Department, 2007 Accumulated foreign direct investment grew by 4.6% during 9 months of 2006 and according to preliminary estimates, as of 1 October 2006, foreign direct investment totalled EUR 7.2 billion, the per capita value being EUR 2135. The largest proportion has been invested in manufacturing (34.5%), financial services (17.7%), transport, storage and communications (11.9%), wholesale and retail trade (11.8%), and utilities (11.5%). The real estate sector attracted 7.7%, or EUR 550 million of the accumulated FDI. Cumulative FDI by Country as of 1 October, 2006 (% of total) 20% 16.3% 11.7% 10% 7% 7% 3.2% 2.8% 2.6% 2.5% 16.3% Russia Denmark Sweden Germany Finland Estonia Luxemburg United States Netherlands Austria Other Source: Lithuanian Statistics Department, 2007 5.6. Retail Trade Retail trade growth has been impressive during the last four years, although the pace slowed down somewhat in 2006. As classic economics suggests, retail trade growth largely depends on expectations, therefore it can be concluded that expectations are still high for the future economic development. As the Lithuanian Statistics Department states, retail turnover, excluding those enterprises trading in motor vehicles and motorcycles, increased by 7% in 2006 as compared to the same period of 2005. Turnover of retailers of non-food items (excluding motor vehicles) in 2006 rose by 7.6% against the corresponding period of the previous year. The growth in the turnover of this group was greatly influenced by large enterprises, whose revenue rose by 27.2%. The most significant increase in turnover was that of enterprises trading in textiles, clothing and footwear (by 35.6%), and food, beverages and tobacco in specialised stores (by 12.2%). Domestic Trade Growth (motor vehicles excluded, compared to corresponding period of the previous year, %) 2000 2001 2002 2003 2004 2005 2006 14.4 2.3 7.9 11.1 10.7 12.9 7.0 Source: Lithuanian Statistics Department, 2007 The impressive growth in domestic trade reflects the increased ability of consumers to spend more money and encourages developers to provide more shopping area available to the market and makes retailers more interested in it. 5.7. National Currency Lithuania’s national currency is the Lithuanian Litas (LTL), which is pegged to the Euro at the rate of EUR 1= LTL 3.4528. It was planned that from 1 January 2007 Lithuanian currency would be replaced by the Euro, unfortunately, because of the slightly higher than permitted annual inflation rate, the Euro-adoption date was postponed. The new projected date for the Euro adoption is 2010. 14 Chapter 6 Office Market Being the most developed commercial market segment in Vilnius and throughout Lithuania, the office market development has revived after a brief slowdown in 2005 and the first half of 2006. While the main projects are still initiated in the capital city, there has also been a significant expansion of modern office space in Klaipėda, although development in Kaunas is not yet so active. 6.1. Vilnius Contrary to steady economic growth and the improving financial situation of numerous businesses, the pace of development of modern office space has slowed down after 2004, resulting in unsatisfied demand for modern premises. In 2006, the supply of new modern premises was only 20,000 sq. m or around half of what became available in 2005. Not surprisingly, rents have gone up in the second half of 2006, and are expected to increase even more in 2007, albeit slightly. The total of modern office space in Vilnius at the beginning of 2007 was approximately 320,000 sq. m. The first offices in Vilnius were located in reconstructed residential premises in the city centre, the Old Town, and Naujamiestis district. Later, new stand-alone office buildings were constructed, in line with contemporary requirements for office environments, and new business districts began to develop. The most intense development of the modern office building segment occurred during 2000-2004. In 2005, the market saw an oversupply of office space, but in 2006 companies wishing to move to new modern offices have faced a shortage of such premises. Business District Development Vilnius has several clearly demarcated business districts displaying active and determined development, though still in process. The main advantages of these business districts are: •other service-provider companies in the vicinity (lawyers, auditors, IT specialists, travel agencies, etc.) •existing commercial infrastructure, e.g. banks, restaurants, shops, hotels and other services. The main business districts are: 1) The Business Triangle on Jasinskio/Goštauto Str., where modern office space exceeds 45,000 sq. m and which can be considered an A-Class location. Unfortunately, this location has very limited or even non-existent expansion possibilities after the successful completion of the Eika Business Centre in the first quarter of 2006; 2) New City Centre/Right Bank of the river Neris – the rapidly changing Šnipiškių district where the first steps were taken in Konstitucijos Ave. with the opening of the new Vilnius Municipality building and the Europa Shopping and Business centres. There are several major projects in the pipeline in this area: Hansabankas and TEO headquarters (20,000 and 10,000 sq. m respectively) and the Registrų Centras in Lvovo Street with two towers of 16 and 24 floors to be available for leasehold (40,000 sq. m in total). 3) Saltoniškių/Geležinio Vilko Str. – an A-Class location undergoing very active development. The attractiveness of this location will increase after a new shopping centre Panorama is completed in spring 2008. 4) North Town, Žirmūnai – a B-Class location attractive for smaller businesses, back offices and activities such as IT, engineering, various services, etc. mainly because of the concentration of commercial buildings and vicinity of attractive residential areas (Žirmūnai and Antakalnis districts). 5) Ukmergės Street – a B-Class location also attractive for smaller businesses and back offices through its vicinity to huge and still actively developing residential areas (Fabijoniškės, Pašilaičiai, etc.). The area is developing in two main directions – retail (mainly DIY, household, furniture, etc.) and B-Class offices. The described business districts are marked in the map below. Main Business Districts in Vilnius 5 4 3 2 1 Source: KOBA, 2007 Average Rent in Main Business Districts (EUR/sq. m/month) Rent EUR /sq. m 1) Business Triangle 2) New City Centre 3) Saltoniškių / Geležinio Vilko Str. 4) North Town, Žirmūnai 5) Ukmergės Str. 16 17 17 12 10 Source: KOBA, 2007 Supply In 2006, the growth in supply of modern office space slowed down in comparison with previous years, mainly as a result of very active development in the residential sector. The imbalance between supply and demand was caused, firstly, by commercial real estate experts doubting the market’s capacity to absorb the new supply. Secondly, development within the residential market is still active, and residential projects enjoy shorter pay-back periods and higher profit margins. Lastly, the time-consuming legislative procedures for obtaining construction permits have discouraged office project developers. In 2006, only a few new business centres and some reconstructed buildings were opened, with a total rentable area of 20,000 sq. m added to the pool of contemporary office space. In comparison, the increase in modern office space in Vilnius was almost 40,000 sq. m in 2005. The biggest multifunctional project due to be opened in 2006 is the Vilniaus Vartai commercial and residential centre, however, the office sections had not been opened by the end of the year. Totally, with Vilniaus Vartai project, 15,000 sq. m of A-Class office premises will come on to the market for leasehold and purchase, which will noticeably influence the office market and partly cover the existing demand for A-Class premises. Nevertheless, the demand for high quality product is expected to remain high, because of the national economy’s continued growth. 16 Demand The demand for modern office premises is most apparent in Vilnius; hence most office-market activity is taking place there. Today, the main drivers for seeking change of office premises are the significant expansion of companies’ activities in line with the growing economy, and current landlords’ inability to fulfil their tenant’s expanding office-space needs. In most cases, landlords simply have no additional office space for rent, while the vacancy level is zero in almost all existing business centres. Often, lease agreements with smaller-space tenants have early termination clauses so that their premises can be vacated in favour of bigger tenants in the same building. The opportunities for new tenants to enter existing centres are very limited. Currently, modern office premises of 100-200 sq. m size located either in the central part of the city with convenient access and parking, or in the northern part of the city (Žirmūnai, Šnipiškės districts, or along Ukmergės Street), are the most sought-after. There is a clear trend for companies to prefer moving to the northern part of the city, where two thirds of the entire city population lives. People trying to avoid heavy traffic during rush hours prefer locations with more convenient access, generally closer to their residential area or along main transport arteries. Not surprisingly, the demand for larger premises and headquarters (over 1,000 sq. m) increased in 2006; however, large companies, requiring such areas of modern office space have no options available, and are obliged to wait until such spaces are constructed. Consequently, negotiations regarding large-size spaces should be started at very early project development stages. It is worth noting that tenants are becoming more demanding in terms of the quality of premises and the services provided. Although rental costs, location and size of the premises remain the main factors in choosing a site, other important aspects, such as plentiful parking for both clients and employees, the professional presentation and image of the business centre, convenient layout and planning of work places, high quality installations and fit-out materials, expansion opportunities and skilled property management also have a great influence. Companies not only care about their image, but also about convenient and secure working conditions for their employees. Rent During 2006, rental prices rose by 10% compared to 2005. The average monthly rent for A-Class office premises in Vilnius is 15-17 EUR/sq. m and 12-14 EUR/sq. m for B-Class premises. Prices mainly vary with location in the city, as the general technical and fit-out features of newly built A- and B-Class premises are relatively comparable. Price differences are also influenced by the image of business centres, their neighbourhood, ease of access and parking facilities. Pipeline Projects As a result of the strong demand, many market players commenced the active development of modern office projects at the end of 2006, and according to their announcements, more than 80,000 sq. m of modern office space will become available in 2007 alone. Nonetheless, as long as nearly all of the constructions are delayed, these openings can be expected to be late too. Thus, it is unlikely that the current market situation will improve in the short term. Over the next few years Vilnius will welcome some 188,000 sq. m of new office space, which is a significant increase by 58% of modern offices supply; therefore, the developers who are thinking of new projects should consider it very carefully. In terms of quality, there is active development of both A- and B-Class premises, which is in line with current demand. Developers are tending toward the construction of multifunctional centres to secure risk diversification, synergic effects for their marketing activities, optimal use of limited parking facilities, a developed business infrastructure, and a business-to-business environment. New Office Building Projects in the Pipeline Project Developer Scheduled Opening Date Location Class Total Area, sq. m Ranga IV (Vilniaus Vartai) 2007 (I Q) Gynėjų Str. A 15,000 Anreka 2007 (I Q) Kareivių Str. B 6,500 Vilmesta 2007 (II Q) Geležinio Vilko Str. A 8,000 Realtus 2007 (III Q) Žirmūnų Str. B 2,700 Skraidenis 2007 (IV Q) Naugarduko Str. B 7,000 Gepaga 2007 (IV Q) Ukmergės Str. B 3,800 Vetrūna 2007 (IV Q) Lvovo Str. A 40,000 Merko statyba 2007-2008 Gabijos Str. B 8,000 Indeco 2008 Ukmergės Str. A 10,500 E.L.L. Nekilnojamas Turtas 2008 Laisvės Ave. B 8,200 Akropolis (Velga) 2009 Geležinio Vilko Str. B 30,000 Hansabankas N/D Konstitucijos Str. A 20,000 TEO N/D Lvovo Str. A 10,100 Domestas N/D Ozo Str. B 6,800 SBA N/D Upės Str. A 6,000 Lietkompexim N/D Viršuliškių Str. B Total 5,500 188,100 Source: KOBA, 2007 6.2. Kaunas The office market structure in Kaunas is somewhat different from that in Vilnius and Klaipėda. It is quite unusual to rent an office in a prestigious location as companies prefer to acquire their own premises rather than rent them in the same business centre that their competitors also have offices. Thus, the supply of modern office space is quite limited; it took some time to lease out even the few office buildings that were constructed in 2003-2004. As a result, developers are quite cautious about instigating new projects. Nevertheless, there are signs in the market that the demand for A-Class offices is reviving. Historically, as in other Lithuanian towns, when the commercial market evolved, the office market initially developed in the central part of the city and the Old Town. Even now, many offices are still found in Kaunas’s main street – Laisvės Ave. – and in nearby streets: Kęstučio, K. Donelaičio, A. Mickevičiaus. However, only a few office buildings have undergone reconstruction and been adapted to contemporary office premise requirements. In addition, car parking problems are yet to be solved. The most sought-after premises in Kaunas are small, often not exceeding 50 sq. m, an outcome of the structure of business in the city. Small and medium businesses predominate, as do relatively small branches of large companies whose head offices are in Lithuania’s capital city. Consequently, the premises offered for rent in modern business centres are divided into smaller units of 30-40 sq. m, which is the main difference from Vilnius business centres’ structure, where the needs of small tenants are rarely catered for. Further from the city centre, in Savanorių Ave., a new business district is beginning to evolve, although not as actively as the business districts developing in Vilnius. The location is active in terms of traffic and also advancing commercially with its modern office buildings attracting blue-chip tenants, including banks and insurance companies. In 2006 the office market was not active and worth to mention is only the reconstructed Business Centre 32 in Vytauto Ave. with 3,600 sq. m of modern office space. Even now, only a few new office buildings are being developed in Kaunas. One of them is a modern 9-storey business centre in Pramonės Ave. close to Urmo bazė, the total size of which will be 3,650 sq. m. The building was scheduled to be opened at the end 18 of 2006, but the opening was postponed. There are also plans to develop a multifunctional project (hotel, retail and offices) in Karaliaus Mindaugo Ave., close to the Akropolis. The average monthly rent for A-Class office premises in Kaunas is 10-11 EUR /sq. m and 6-9 EUR / sq. m for B-Class premises. As the city’s rental prices are quite low, there is no likelihood of them declining. Average Rent (EUR / sq. m/month) Kaunas A-Class 10 B-Class 7.5 Source: KOBA, 2007 6.3. Klaipėda Currently, the largest proportion of the Klaipėda office market is made up of older construction premises renovated and converted into modern office space. As in Vilnius though, there is a trend to move away from the Old Town to newly-built premises with high-standard office equipment and better parking facilities. At present, there are several projects at different development stages, which will add a total of more than 50,000 sq. m of new modern office space to the market in 2007-2009. In terms of demand, B-Class premises are currently more sought-after mainly due to the lower rents, whereas the supply of A-Class office premises was increased by a number of new projects. Additionally, as in Kaunas, it is mostly small and medium businesses that operate in Klaipėda, along with small branches of large companies whose head offices are in Vilnius. By the end of 2006, one of the most modern office buildings, the 20-floor K-Centre (6,000 sq. m) was completed in the very city centre, close to the hotel Klaipėda. Naujojo Uosto Str. and Taikos Ave. have the most appeal for office developers and several new projects are currently being developed in different parts of these streets. In July 2007, a new A-Class office building Neapolis will be opened at the corner of Taikos and Agluonos Str. One section of the building will be a 16-storey tower, the other of only 4-storeys. The latter will be occupied by the regional headquarters of Hansabankas and will be completed earlier than the rest of the building. New Office Building Projects in the Pipeline Project Developer / Owner Location Total Area, sq. m Vestrina (B1) Minijos/Bijūnų Str. 21,000 Neapolis Taikos/Agluonų Str. 10,500 Memelio miestas Naujoji Uosto/Danės Str. 10,000 Kleta Naujoji Uosto/Šerniaus Str. 6,500 Eika (B12) Baltijos Ave. 2,300 Plienas (Gandrališkės) Kuosų Str. Total 1,900 52,200 Source: KOBA, 2007 There are also several projects being developed further away from the Klaipėda city centre, most of which will be combined with warehouses and logistics facilities. The rent for such premises varies from 7 to 10 EUR /sq. m/month. In general, the average monthly rent for A-Class office premises in Klaipėda is 11-13 EUR /sq. m and 7-10 EUR /sq. m for B-Class premises. Average Rent (EUR / sq. m/month) Klaipėda A-Class 12 B-Class 8 Source: KOBA, 2007 6.4. Šiauliai No A-Class office buildings exist in Šiauliai. The needs of the few existing tenants are satisfied with converted B-Class premises on the first and second floors of existing buildings. Manufacturing companies have their own administrative buildings. The first A-Class offices were planned by developer E.L.L. Nekilnojamas Turtas as a part of the multifunctional commercial centre Saulės Miestas. However, the project featuring an office and hotel building was postponed for distant future, as the market is not able to absorb such supply. The most sought-after premises are in the size range of 40-60 sq. m. Currently, monthly rental prices vary from 3 to 7 EUR/sq. m in residential and industrial districts, while premises in the central part of the city can be leased for 6-8 EUR/sq. m. Average Rent (EUR / sq. m/month) Šiauliai B-Class 6 Source: KOBA, 2007 6.5. Panevėžys The current situation in Panevėžys is similar to that in Šiauliai. There are no A-Class office premises available, and most of the B-Class office space is in older buildings which have been reconstructed and modernised. Most companies prefer acquiring their own office premises rather than renting them. The situation will change after the opening of the office building (app. 13,000 sq. m), with car parking on its roof, due at end 2007/beginning 2008. This is the only announcement about A-Class office development. i.e. the second stage of the Babilonas multifunctional centre by Ogmios Centras. Average Rent (EUR / sq. m/month) Panevėžys B-Class Source: KOBA, 2007 20 6 Chapter 7 Retail Market 7.1. General Remarks The Lithuanian retail market still lags behind those of the other Baltic States, consequently it is experiencing very active development. Current shopping centre development is not limited to the capital, but has spread to other cities, in some of which new projects anticipate dramatic increases to the gross area of retail space. Successful pre-leasing of premises in new shopping centres and low or zero vacancy levels in existing retail premises reflect huge interest on the part of retailers and have encouraged developers to consider new projects. Additionally, growing interest from investors resulting from the EU membership and the country’s declining risk status, increases pressure on developers to react in line with existing demand. In 2006, major Lithuanian retailers (Apranga, Lelija, Lėvuo, etc.) took their first steps beyond the country’s five largest cities. In September, 2006 a new 3,700 sq. m shopping centre Aušra was opened in Utena. Other shopping and entertainment centres are planned to be opened in Gargždai by Pamario Namas (around 20,000 sq. m), in Elektrėnai by Irlanda (around 7,000 sq. m), in Marijampolė by Artapolas (8,000 sq. m). The interest of international retailers in the Lithuanian market is increasing. In 2006, several new brands were introduced: Tommy Hilfiger, GANT, Cop.Copine, Pull&Bear, Pierre Cardin, New Yorker, Bershka and Esprit; also several international retailers announced their intention to open shops in 2007, including Marks&Spencer, Lindex and La Senza. To date, most international retailers have licensed franchisees rather than entered the market themselves, for example ZARA, Bata, Marc’O’Polo, Tommy Hilfiger, Mexx, Hugo Boss, Esprit and Mango. Of course, the three Baltic States are often still treated as one small market in general, and some international brands (H&M, IKEA, Stockman, etc) still wait for more appropriate time to enter the Lithuanian market. Main Developers The main developers working on shopping centre projects are Hanner (Europa SC in Vilnius, Arena SC in Klaipėda, Savas SC in Kaunas), Senukai (Banginis in Vilnius, Mega SC in Kaunas and a numerous DIY outlets throughout Lithuania), VP Market Group (Akropolis in Vilnius, Kaunas, Klaipėda and a number of Maxima super/hypermarkets throughout Lithuania), Ogmios Centras (Domus Galerija, North Town project in Vilnius, Bruklinas SC in Šiauliai, Babilonas SC in Panevėžys), E.L.L. Nekilnojamas Turtas (Panorama SC in Vilnius, Saulės miestas SC in Šiauliai), and the Rubicon Group (Ozas SC in Vilnius). Major Anchor Tenants Major anchor tenants are: Maxima LT (Maxima, the largest grocery chain), Senukai (DIY), RIMI Baltic (RIMI grocery chain), Rivona (Norfa grocery chain), Palink (IKI grocery chain), Apranga (fashion retailer), Lėvuo (fashion retailer), Armitana and Danbalt (footwear and fashion retailers), Elektromarkt and Topo centras (home appliance retailers), Čilija (restaurants). One of the main characteristics of this market segment is the continued dominance of the domestic players in the grocery sector. Local chain Maxima is the leader in this segment, however, the RIMI, IKI and Norfa chains are also rapidly increasing store numbers. This dominance is the likeliest explanation for the decision of German grocery chain Lidl, which had announced ambitious plans to open discount stores all over the country and had already acquired land, to suspend its activities in Lithuania. Retail Chain Shops in Lithuania (end of year) Number of Shops 2005 2006 Maxima 195 202 IKI 153 199 Norfa 124 111 RIMI 37 51 Source: KOBA, 2007 7.2. Vilnius In general, foreign retailers want to open their first shops in the Lithuanian capital, whereas local retailers are focussed on maximising their market share. This makes demand for retail space quite strong with high levels of pre-leasing and almost zero vacancies in the main retail streets and shopping centres. The major driving forces for the growth of the retail market in Vilnius are: •increasing consumer spending power; •one of the lowest unemployment rate in the country; •higher average income than in other Lithuanian cities; •increasing number of local and foreign visitors; •changing shopping habits. Today, Vilnius possesses up to 500,000 sq. m. of modern retail area which can be split into three specific segments: high-street shops, super and hypermarkets, and shopping centres. In 2006, only one shopping centre was added to the Vilnius retail market – BIG (19,000 sq. m). Main Retail Streets in Vilnius There are four main retail and leisure streets in the capital of Lithuania: •Gedimino Avenue •Pilies Street •Vokiečių Street •Didžioji Street. Each of these streets has unique features in terms of location, attractiveness to consumers and retailers, and potential for expansion of retail premises. Gedimino Avenue Gedimino Avenue is the most prestigious high street in Lithuania, especially after its reconstruction, although the least active section is still awaiting reconstruction. Entertainment, leisure, and shopping areas are available on Gedimino Avenue, but its main point of attraction is the opportunity to breathe its history. Retail space on Gedimino Avenue is particularly limited; most tenants stay in their leased premises for 10 years or longer, whereas new shops can only open by replacing current tenants or changes in ownership. Be- 22 cause of the limited new building construction opportunities on Gedimino Avenue, the only way to increase its retailing area is to convert existing premises into retail outlets. While there are still many institutional buildings, currently accommodating government bodies, Gedimino Avenue is still perceived to possess potential for further development as an attractive retail and leisure area. There are two shopping centres in Gedimino Avenue, Flagman and Grand Duke Palace; one more, the contemporary high-class shopping centre Gedimino–9 with a total area of 18,000 sq. m, is due to open in the street’s best section, in spring 2007. Gedimino Avenue is particularly attractive for retailers to establish either a shop or a flagship store there, but interest levels vary, depending on the exact location along Gedimino Avenue. Segmentation of Gedimino Avenue D C B A Compared to other streets in the city, pedestrian flows in Gedimino Ave. are easily the highest; to be more precise, the most popular part of Gedimino Ave. is from the start of the street up to the ZARA department store (marked as Section A in the map above). Further along, pedestrian flows decrease, and more gaps appear between shops because of institutional buildings and city squares. This is clearly reflected in rental levels (see below). Average Rent (EUR/sq. m/month) Rent Section A Section B Section C Section D 35 - 64 30 - 40 25 - 32 20 - 23 Source: KOBA, 2007 Old Town Having been, historically, one of the city’s main shopping streets, Pilies Street is now a mainly tourist- (amber, jewellery and souvenirs shops) and leisure-oriented (cafes, restaurants, hotels) area. Vokiečių Street was formerly quite attractive to both retailers and consumers, but the insufficient pedestrian flow, difficult parking conditions, the rapid development of out-of-city shopping centres and consumer preferences to shop in them have combined to turn it into a leisure space, which today features cafes, restaurants, casinos, but very few retail outlets. In contrast, Didžioji Street has evolved into one of the most well-appointed shopping areas in Vilnius, where all major high-end brands have their boutiques or shops (including Armani, Hugo Boss, Roberto Cavalli and Escada). In 2006, the appeal of Didžioji Street was temporarily diminished due to the reconstruction of the Town Hall Square, planned to be completed in spring 2007. The reconstruction will add value to Didžioji Street both as retail, leisure and tourism area. As a result of the differing characteristics described, Vilnius retail streets rental prices vary with location. Average Rent (EUR/sq. m/month) Street Pilies Vokiečių Didžioji Rent 35 30 42 Source: KOBA, 2007 Shopping Centres in Vilnius Shopping centres have only been present in the Lithuanian market for a few years, and there are still many opportunities for expansion, especially when equivalent retail space figures in the other Baltic States are considered. Although the Lithuanian market is larger in size, rentable retail space per capita is smaller than in Latvia and Estonia. One peculiarity of Vilnius and the Lithuanian retail market in general is that the major developers are often associated with the anchor tenants of the shopping centres, for example Maxima, Senukai, Norfa, RIMI. Only one shopping centre was opened in Vilnius in 2006. In September, the two-storey district shopping centre BIG (19,000 sq. m) was opened by local developer Baltijos Investicijų Grupė, who also developed a centre to the same concept in Klaipėda in 2004. Main Shopping Centres in Vilnius Shopping Centre Total Area, sq. m Akropolis 109,000 BIG Vilnius 19,000 Europa 21,500 VCUP 19,700 Mada 19,000 Domus Galerija 10,000 Mandarinas 8,000 Flagman 7,000 Total 213,200 Source: KOBA, 2007 While all the shopping centres differ in their location, interior planning and mix of tenants, rental levels are quite similar and are shown in the table: Average Rent (EUR /sq. m/month) Rent Anchor Tenants Medium Areas (>100 sq. m) Small Areas (< 100 sq. m) 7-15 15-35 30-50 Source: KOBA, 2007 Pipeline Projects The number and scope of projects in the pipeline show that Lithuanian retailers and property developers are seriously interested in the growth of the capital’s retail segment. The Vilnius shopping centre market is expecting a substantial 80% increase in space over the next two years. The main pipeline shopping centres are described in the table below, additionally, more modern retail space will come on to the market after the completion of 24 two projects: Helios City in Konarskio Str. (7,000 sq. m) and Vilniaus Vartai in Gynėjų Str. (over 7,000 sq. m), which will offer retail units for luxury brands and premises for restaurants and a night club. Pipeline Projects in Vilnius Project Name Opening Date Location Total Area, sq. m Gedimino-9 2007 Gedimino Ave. 18,000 Panorama 2008 Saltoniškių Str. 65,000 Ozas 2008 Ozo Str. 93,000 Akropolis (Velga) N/D Geležinio Vilko Str. Total 100,000 276,000 Source: KOBA, 2007 Three new projects, currently under development, will significantly influence the Lithuanian capital’s shopping centre market. The Gedimino-9 SC on Gedimino Avenue will start operating in a former Vilnius municipal building in the spring of 2007. The Gedimino-9 project will feature five floors of modern shopping area focused on middle- and upper-class customers. Several international brands have already announced their intention to open their first shops in this centre, including Marks & Spencer, Lindex and PO.P. The decision to open their first shops in Lithuania in Gedimino-9 attests to the high level of confidence in this project. Additionally, in 2006 Estonian developer E.L.L. started construction of a 65,000 sq. m shopping centre named Panorama in one of the most prestigious districts in Vilnius, at the junction of T. Narbuto, Geležinio Vilko and Saltoniškių streets, with the intention of opening it in spring 2008. The area is attractive because of its vicinity to the city centre and the relatively commercial neighbourhood with one modern business centre built in 2002 and several more planned for 2007-2008. The three-storey Ozas of 93,000 sq. m is planned to be opened in 2008. The project is being developed by local company Vilniaus Pramogų Parkas (part of the Rubicon Group) and Germany’s ECE Projektmanagement. The location of the shopping centre will give a central focus to a number of existing commercial and leisure projects: the Siemens Arena, the Vichy water amusement park to be opened in the spring of 2007, and existing and planned business centres. In the pipeline, Vilniaus Akropolis is planning to develop 13 ha of the former Velga industrial territory in Geležinio Vilko Street into a multifunctional centre with retail, office and residential premises. In total, the project will exceed 200,000 sq. m and is scheduled for final completion in 2015. 7.3. Kaunas For a long time the most attractive retail place in Kaunas has been the pedestrian Laisvės Avenue, where shops and restaurants prevail. In terms of brand names, numbers of retail units and pedestrian flow, the location is on a par with Vilnius high street Gedimino Ave. However, the imminent arrival of Akropolis (83,000 sq. m) in the first quarter of 2007, has made some market players quite pessimistic about Laisvės Avenue’s future appeal and its ability to compete with this huge new rival, given that rents have begun to fall, even before the opening of Akropolis, and the fact that some of the location’s successful retailers have announced they will close their shops and move to Akropolis. There were no new shopping centres opened in Kaunas in 2006, but one, Molas, was reconstructed after the Senukai hardware and home decoration centre moved out to Mega. After its reconstruction, Molas has succeeded in attracting several clothes, footwear, household goods and beauty brands, all of which were already present in the Lithuanian market. Main Shopping Centres in Kaunas Shopping Centre Total Area, sq. m Mega 72,000 Molas 22,600 Merkurijus 14,000 Savas 13,500 Dainava 9,000 Total 131,100 Source: KOBA, 2007 The regional Mega SC (72,000 sq. m), located on the Vilnius – Kaunas – Klaipėda highway in Kaunas is worth mentioning because it is positioning itself as the biggest shopping and leisure centre in central Lithuania. The anchor tenants are a RIMI Hypermarket and a Senukai (DIY) shop. Other Kaunas shopping centres (Molas, Savas, Dainava) mainly service their neighbouring residential districts. Additionally, many people are still used to shopping in the Urmas retail park, a mixture of both retailers and wholesalers. The total area of Urmas is 15 ha; with the total trading area exceeding 60,000 sq. m and more than 1,200 tenants. Average Rent (EUR / sq. m/month) Kaunas High Street 35 Shopping Centres 15 Source: KOBA, 2007 Pipeline Projects Akropolis, with total space of more than 83,000 sq. m, is situated close to the main pedestrian street – Laisvės Ave. and Karaliaus Mindaugo Ave. The anchor tenant Hyper Maxima will take up 6,800 sq. m and the ice arena will account for 1,500 sq. m. The main factors of Kauno Akropolis appeal are the popularity and success of its sister projects in Vilnius and Klaipėda, its good location (close to Laisvės Ave., the main high street, and the island of the river Nemunas on which a sports and leisure arena is to be built), a strong anchor tenant (Hyper Maxima), a large number of tenants (around 200 shops), good parking (some 2,800 spaces) and its leisure attractions (ice arena, bowling, etc.). There are no other new shopping centres in the pipeline: the development of new shopping centres has been suspended for some time while the Kaunas municipality develops a special plan for allocating land for new centres in the city. The Laisvės Ave. pedestrian street is also waiting for reconstruction plans to be finalised. 7.4. Klaipėda The main retail street in Klaipėda is H. Manto Street, which is a continuation of Taikos Avenue – one of the main thoroughfares, connecting the southern and northern parts of the city. H. Manto Street, with large flows of both transport and pedestrians, concentrates public institutions, offices, hotels, restaurants and retail outlets. There are a few shopping centres on the high-street section of H. Manto: Mega Plaza (5,000 sq. m), Kapitolijus (3,000 sq. m), Studlendas (3,500 sq. m); other projects, currently under development, are Žemaitija (2,500 sq. m) and Manto namai (3,000 sq. m). 26 Unsurprisingly, 2006 was a quiet year after 2005, a big year for openings in Klaipėda, when Saturnas (5,700 sq. m), Arena (18,000 sq. m) and Grandus (12,000 sq. m) shopping centres were opened, and Hyper Maxima conversion into Akropolis (75,000 sq. m) was completed at the end of the year. At the end of 2006, a new Studlendas SC, combined with lecture halls and other public premises, was opened on the Klaipėda University campus. Main Shopping Centres in Klaipėda Shopping Centre Total Area, sq. m Akropolis 75,000 BIG 21,000 Arena 18,000 Grandus 12,000 Saturnas 5,700 Avitela 5,200 Mega Plaza 5,000 Studlendas 3,500 Kapitolijus 3,000 Total 148,400 Source: KOBA, 2007 Pipeline Projects There are several retail projects in the pipeline. One of them is Manto namai, a new shopping centre (3,000 sq. m), which will open its doors at the junction of H. Manto high street and pedestrian M. Mažvydo Street in the first quarter of 2008. Manto namai project, with a total area of 11,000 sq. m, combines a shopping centre in the first two floors with prestigious apartments on the three upper ones. In spring 2007, the construction of a major extension to the BIG Shopping Centre will commence. When completed, the size of the centre will be doubled, as some 20,000 sq. m will be added to the existing 21,000 sq. m. The developer, Baltijos Investicijų Grupė, will also build two or three 20-25 storey residential buildings. The whole project is scheduled for completion in spring 2008. A new specialised interior design and home decoration shopping centre Namo Inžinerijos ir Interjero Centras (NIC, 4,500 sq. m) is under construction in Minijos Street. The opening is scheduled for April 2007. It will be the second centre of this concept in Lithuania. The first NIC centre was opened in 2005 in Kaunas. Another similar project, SBA Idėjos Namams (5,100 sq. m), will be developed in Baltijos Ave. The most complicated project in terms of capacity and timeline is Jūros Vartai, the aim of which is to completely change the former Klaipėdos Laivų Remontas (shipyard) industrial area by expanding Klaipėda city centre and opening up access from the city to the sea. The preliminary date for project completion is 2015. As well as shopping galleries, restaurants and leisure centres, the project will also encompass office building and hotel development. A similar project is anticipated for the other bank of the river Danė is called Memelio Miestas and due by the end of 2012. The project will include shopping galleries (11,500 sq. m), a night club, casino and restaurants (3,300 sq. m) and other commercial and leisure space. The developer is called by the name of the project and is a purposely launched company. Other projects include Vaiva, a mixed commercial and residential project, and a 4-storey shopping centre (9,100 sq. m) by Šiaulių titanas; both of them are in H. Manto Str. Average Rent (EUR / sq. m/month) Klaipėda Source: KOBA, 2007 High Street 26 Shopping Centres 17 7.5. Šiauliai As a result of the Lithuanian economy’s continuing expansion and consumers’ increasing purchasing power, the commercial real estate market experienced significant growth in Šiauliai. A few new shopping centre projects were started or continued construction in 2006, in both central and suburban locations. A new shopping centre Saulės Miestas with rentable area of 20,000 sq. m and anchor tenant Hyper RIMI (4,500 sq. m), integrated with the city’s bus station, was completed by international developer E.L.L. Nekilnojamas Turtas. The reconstruction and expansion of Norfa XXL was commenced in 2006. It will become the Bruklinas Shopping Centre with up to 26,000 sq. m of retail space. A new hotel of almost 10,000 sq. m total area is also planned by the same development company. The project is due for completion by spring of 2007. Another local developer, Lukerta, has started the construction of shopping and entertainment centre Tilžė in the central part of Šiauliai, in Tilžės Street, the city’s major transport artery, passing right through Šiauliai and becoming the main road to Riga (Latvia). The centre, with an area of 31,000 sq. m, will be opened by the end of 2007. Pipeline Projects in Šiauliai Project Name Opening Date Total Area, sq. m Saulės miestas 2007 52,000 Bruklinas 2007 26,000 Tilžė 2007 31,000 Total 109,000 Source: KOBA, 2007 As to date, Šiauliai possessed no actual shopping centres, it is expected that all three new projects will attract the interest of both retailers and customers. More points of attraction should also increase the number of visitors to Šiauliai from neighbouring areas, as was the case with the Akropolis in Vilnius, when people from other cities came for shopping and entertainment. The new shopping centres will certainly boost the appeal of the pedestrians-only Vilniaus Str. Monthly rental prices for retail premises located in the central part of the city, depending on location, the allure of the district and pedestrian flow, can reach 20 EUR /sq. m, whereas average rental prices in other districts are between 3-9 EUR /sq. m. For shopping centres, they reach 18 EUR /sq. m. Average Rent (EUR / sq. m/month) Šiauliai High Street 20 Shopping Centres 18 Source: KOBA, 2007 7.6. Panevėžys Similarly to other Lithuanian cities, Panevėžys main retail area is located in the city centre and the old town, mainly occupying the ground floors of existing buildings. There are several supermarkets located further from the city centre, mainly serving the population in their neighbouring districts. 28 The developer Ogmios Centras is continuing the construction of the Babilonas multifunctional centre in the southern part of Panevėžys. The first phase of the development (a 27,000 sq. m shopping centre) was completed in the autumn of 2005. The second phase will encompass two 3,000 and 5,000 sq. m buildings (trade in agricultural and construction equipment) to be completed in the first quarter of 2007, and a 15,000 sq. m DIY outlet due at the beginning of 2008, with an additional 19,000 sq. m area shopping and entertainment centre, an office building and a hotel in the pipeline. Ogmios Centras is planning to continue the construction of residential, industrial and additional entertainment and shopping space on this land right through to 2009. Average Rent (EUR / sq. m/month) Panevėžys High Street 20 Shopping Centres 9 Source: KOBA, 2007 In conclusion, the significant expansion of shopping centres (see the table below) might suggest doubts whether the market is ready to absorb it, however, we believe that with continuing retail demand, rental levels in shopping centres are to remain stable. Future Supply of Shopping Centre Space (sq. m) Shopping Centres Source: KOBA, 2007 Vilnius Kaunas Klaipėda Šiauliai Panevėžys 276,000 83,000 59,000 109,000 34,000 Chapter 8 Warehouse/Industrial Market 8.1. General Remarks Regardless of the fact that the Lithuanian market for modern warehouse and industrial premises is at the initial stage of its development, the demand for logistics services is increasing and businesses require more of them as goods’ traffic flows into and out of the EU have increased since Lithuania’s accession to the alliance. Despite this, high land prices, a lack of appropriate sites and leasing structures are major obstacles and are holding back the market’s development. The leasing of industrial premises is expected to remain stable, while the market has a lot of growth potential during the coming period. The Lithuanian warehouse market mainly comprises older premises and only a few new buildings have been constructed to date. Concrete block and brick warehouses and production facilities, built between 1962 and 1990, as well as large-area administrative buildings, dominate the warehouse markets of all major cities, with a few exceptions of new, most often purpose-built, modern warehouse buildings or renovated old ones. Today, a large proportion of older warehouses and administrative buildings have been equipped for wholesale and retail trade, and goods’ storage. New facilities are scarce and those developed earlier in almost all cases are owner-occupied warehouses and industrial facilities. New constructions of warehouses/logistics centres are being developed in stages, mostly close to three main cities: around Vilnius, in the Kaunas Free Economic Zone (FEZ) and near the Via Baltica highway, and in the Klaipėda FEZ. The most active industrial developments are being undertaken near the main international European transport corridors that cross Lithuania: •The Via Baltica highway (route No. I) in a north-south direction and railway line Rail Baltica on the Tallinn-Riga-Panevėžys-Kaunas-Warsaw route, •In an east-west direction: the Kiev-Minsk-Vilnius-Klaipėda road (route IXb) and the Kaunas-Kaliningrad road (route IXd). With the Lithuanian economy continuing to grow, the demand for modern warehouse and light manufacturing industrial units is increasing, driven mostly by the development of companies involved in logistics, distribution and the wholesale sector, export-oriented local clothing manufacturers, companies in the electronics and food/catering industries, and information technology companies. In the meantime, newly constructed or projected modern warehouses are oriented to large clients with tight lease agreements. As a result, the rentable area of the premises offered to the market varies from 2,000 to 10,000 sq. m. On the demand side, however, the most sought-after are small premises within city boundaries, so finding suitable premises for both big and small customers takes time because of the specific requirements for warehouse premises. The overall increase in land prices, the huge growth in demand for residential premises has caused developers be more active in the residential segment and be more conservative in the warehouse segment. The recent boom in the residential market has also distorted market values of land. Land for residential purposes is in short supply, therefore land prices across the board increased significantly, as it is frequently possible to change the land-use purpose. The establishment of public logistics centres in Lithuania will be partly funded by the EU, the total commitment during 2007-2013 amounting to EUR 63.4 million, mostly allocated to the Vilnius and Klaipėda public logistics centres. Monthly rental prices per square metre vary depending on location, lease conditions and size of the rented premises. Modern industrial/warehouse properties are rented from 4 to 6 EUR/sq. m/month for warehouse premises, and from 3.4 to 7.2 EUR/sq. m/month for office space in all major Lithuanian cities. Selling prices start from 300 to 400 EUR/sq. m. for average quality premises. 30 8.2. Vilnius In general, not just in Vilnius, warehousing and industrial facilities are moving out of city centres mainly because of inner- city traffic problems, rising land prices, which are too high to maintain industrial or warehousing premises in the city, and as a result of the general supply of land, which is more available outside cities (larger areas and variety of locations). Because of its capital-city status, concentration of major retailers and developers, good location and accessibility, Vilnius has good opportunities for the development of logistics/warehouse properties. The most suitable locations are the Vilnius-Kaunas highway, Minskas road and the new industrial-purpose area close to Lentvaris. As a result of the Vilnius market’s lack of new purpose-built and speculative warehouse developments and the absence of major international developers with experience in the field, larger companies have commenced building their own warehouses. The biggest warehouses in Vilnius are located in the Kirtimai, Paneriai and Vilkpėdė districts, where historically, industrial businesses have operated, and near Minskas road. Currently, Vilnius possesses several newly built warehouse/logistics buildings with space available for rent. New Logistics Centres/Warehouses Opened in Vilnius in 2006 Project Total Area, sq. m Dobrovolės logistics centre 17,000 Žarijų logistics centre 14,000 Autoverslas warehouse 7,000 Girteka warehouse (II phase) 5,600 Total 43,600 Source: KOBA, 2007 Ogmios centras has started the development of a modern warehouse with office premises close to Vilnius airport and the projected southern bypass. The project will make a total of more than 20,000 sq. m of modern warehousing space available to the market. The first tenant, DHL Lietuva, has already announced the signing of a long-term lease and plans to open a new logistics terminal of 5,600 sq. m in the first quarter of 2008. The Vingės Logistikos Grupė (VLG) started the construction of a 18,000 sq. m logistics centre on the main national highway between Vilnius and Klaipėda in 2006. VLG intends to build one more logistics centre in the Klaipėda FEZ. 8.3. Kaunas Most specialists agree that Kaunas, being the geographical centre, will become the country’s logistics and warehouse centre too. However, only a few small projects have been finished to date, and three logistics facilities are in the pipeline. Developer YIT Kausta has commenced the construction of a warehouse and office space, Kaunas Terminal, which will release a total of 30,000 sq. m of modern space in the Kaunas Free Economic Zone (FEZ) by the second half of 2007, the first phase of development. Kaunas Terminal has already attracted two tenants – Combifragt Lietuva (13,000 sq. m) and Alma Littera (5,000 sq. m). The Kaunas FEZ is located close to the country’s main transportation corridors as well as the local Karmėlava airport, and offers a number of tax incentives to developers. A new logistics centre, Baltic Logistics City, is under development close to the Via Baltica highway. Over three development stages, the market will receive a total of around 56,000 sq. m of modern warehousing and administrative premises by the end of 2008. In addition, Baltreal Invest has announced an initiative to create a retail, transport and logistics park close to the Mega Shopping Centre and Via Baltica highway. 8.4. Klaipėda Klaipėda, being Lithuania’s main port city of the eastern cost of the Baltic Sea, is attractive for both industrial and logistics businesses. The warehouses that have been newly constructed are mainly directed towards the goods which pass through the seaport. The Klaipėda Free Economic Zone (Klaipėda FEZ) is the first free economic zone in Lithuania, offering favourable conditions and benefits to various businesses. Its territory was increased from 205 ha to 305 ha in 2006, proving that the zone is working successfully. The Klaipėda FEZ has more than 20,000 sq. m of modern warehouse space available. Several infrastructure developments are anticipated to go ahead in the FEZ. 8.5. Šiauliai and Panevėžys The industrial markets of Šiauliai and Panevėžys are dominated by reconstructed or older warehouse and industrial facilities. Although Šiauliai has many large industrial companies, the market lacks modern industrial and warehousing premises with convenient access and parking. The Šiauliai city council initiated the formation of a 165 ha Industrial Park in the Zokniai district. Under this initiative, industrial companies will be encouraged to move out of the central part of Šiauliai into more industrial zones. The industrial park is close to the Zokniai airport and a logistics centre is included in the plans. Similar industrial parks will also be established in other regions: Panevėžys, Kėdainiai, Visaginas, Marijampolė, Alytus, Akmenė. It is anticipated that companies will be able to commence operations in these parks by the middle of 2008. Developer Ogmios Centras is planning to build logistics/warehouse facilities on its 46-hectare development site in Panevėžys. New Construction Rent (EUR /sq. m/month) Warehouse/Logistics Source: KOBA, 2007 32 Vilnius Kaunas Klaipėda 4.2-6 4 -5.5 4 -5 Chapter 9 Hotel Market The number of guests staying at hotels in Lithuania is increasing continuously. In 2005, according to the Lithuanian Statistics Department, hotels accommodated 22.6% more guests than in 2004. Foreigners made up 65% of overnight stays. The major sources of international guests were Germany (20%), Poland (14%), Estonia and Latvia (10%), and Russia (6%). The Lithuanian Statistics Department figures show that most people visit Lithuania for holidays (43.9%) and business (38.6%). Additionally, the number of visitors travelling by air increased every month during the first eleven months of 2006, and Lithuanian airports handled 24.7% more passengers. During the first three quarters of 2006, Lithuanian hotels and motels accommodated more than 1.2 million guests or 13.6% more than during the same period in the previous year. Activities of Accommodation Establishments 2002 2003 2004 2005 247 270 317 331 Hotels 225 243 278 290 Motels 22 27 39 41 Number of rooms in hotels and motels 6,179 7,384 9,465 10,134 Number of guests, thousands 498.8 559.8 788.1 969.3 Increase in number of guests, % (compared to previous period) 11.5 12.2 40.8 23.0 Total number of hotels and motels Hotel occupancy rate, % 35.2 32.5 36.7 40.8 Total income for accommodation, LTL thousands 194,892 217,401 285,115 373,049 Total expenses, LTL thousands 172,495 193,347 252,102 306,026 Source: Lithuanian Statistics Department, 2007 During 2005, hotels in Vilnius accommodated 451,700 guests, which is 19.4% more than in 2004. The occupancy rate for Vilnius hotel rooms was 51% (in 2004 – 45.2%). Hotel occupancy rates for the country overall are lower (40.8% in 2005), the busiest month in 2005 being July (56.3%), the least busy – January (25.9%). Most of the hotels in Lithuania are small and privately owned. Among the larger ones, management contracts (e. g. Radisson SAS, Scandic, Reval) are dominated by private owners. As of September 2006, there were 287 hotels (a quarter of them in Vilnius) with 10,307 rooms in Lithuania, and the number of beds totalled 20,370. Hotel and Motel Room Categories Apartments Lux Single-rooms Double Other 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005 204 199 944 988 1475 1579 5637 6646 679 722 Vilnius 58 61 229 247 558 687 2430 2486 199 202 Kaunas 4 4 64 63 115 121 412 461 29 36 Lithuania – total number of rooms in hotels and motels Klaipėda Average rooms prices in hotels, EUR 15 15 122 106 106 107 597 602 79 83 147.1 145.7 90.9 90.4 52.7 55.3 73.6 68.4 39.1 41.1 Source: Lithuanian Statistics Department, 2007 Qualification Categories of Hotels and Guests houses (2005) 5* 4* 3* 2* 1* NonClassified Total 7 49 101 55 18 60 290 Number of Rooms 560 2732 2880 1864 822 869 9722 Number of Beds 1106 4992 5812 3595 1737 1833 19075 Rooms Occupancy Rate, % 41.5 50.4 39.0 35.7 34.5 27.5 40.8 Number of Hotels Source: Lithuanian Statistics Department, 2007 The first Lithuanian hotel within the Kempinski chain will open its doors in Vilnius in the first half of 2007. The hotel, called AAA Kempinski Hotel Vilnius will be established in Vilnius Old Town, in the former telegraph building at the crossroads of Universiteto and L. Stuokos-Gucevičiaus streets. The hotel will have 110 rooms, a conference centre, spa facilities and a restaurant. The Centrum hotel chain has acquired an abandoned building in Liejyklos Street and announced plans to expand the hotel Artis by 36 rooms. Also, the Best Western Naujasis Vilnius hotel in Vilnius is under reconstruction. Ogmios centras subsidiary City Hotels, together with construction company Vyrokas, has started the construction of a four-star hotel in Bokšto Street. The Reval Hotels chain has stepped into the economy class hotels sector by acquiring two Baltpark hotels in Vilnius and Klaipėda in 2006. The chain has also acquired the Takioji Neris hotel in Kaunas and commenced its reconstruction, with completion scheduled for spring 2008. After the reconstruction, the hotel will be named the Reval Hotel Neris and will have 190 rooms, a new restaurant and a conference centre. Reval Hotels plan to manage 12 hotels in the Baltics by the end of 2008. In Kaunas, reconstruction of the Respublika hotel is scheduled to be finished by the end of 2007. Kauno verslo rūmai, the developer of this project, expects that the hotel will be managed by an international chain, whose name has not yet been disclosed. The new hotel will have around 300 rooms. The expansion of hotels is ongoing in all major cities as well as in both seaside (Palanga, Neringa) and health resorts (Druskininkai, Birštonas, Molėtai). Additionally, a significant expansion of rural tourism has been seen during recent years and many international tourists were attracted. 34 Chapter 10 Investment Market The number of investors coming into the Lithuanian market seeking large and small investment opportunities has increased as a consequence of the EU accession, impressive economy growth and the current climate of relatively low rental prices; a combination adding up to comparatively low risk. On the other hand, the Lithuanian investment market is comparatively small and very often large institutional investors perceive the three Baltic States as one market without distinguishing separate countries. Therefore, when making decisions to enter the market, they look for attractive investment opportunities within all three Baltic countries. Prime Yield Development, 2000-2007 14% 13% 12% 11% 10% 9% 8% 7% 6% 2000 2001 2002 2003 Retail 2004 Offices 2005 2006 2007 F Warehouses Source: KOBA, 2007 After a significant decline over the last 3-4 years, the pace of reduction in yields is expected to slow down in 2007. The main factors causing declining yields are the following: •Rapid economic growth and development; •The EU and NATO membership; •Launching of new investment funds and increasing competition in investment market; •Difficulties in finding investment opportunities in global markets; •Fluctuations in stock markets causing increased investment in real estate. Major Investment Transactions in 2006 Project Seller Buyer Property Type City Total Area, sq. m Babilonas Gamarenta Dawnay Day Carpatian Plc Shopping centre Panevėžys 27,000 Deco Baldų pasažas Explorer Property Fund Shopping centre Klaipėda 5,200 Dobrovolė MEI Baltija Heitman Logistics centre Vilnius 17,000 Kaunas Terminal (Kaunas FEZ) YIT Kausta Genesta Property Nordic Logistics centre Kaunas 28,000 Mandarinas E.L.L. Nekilnojamas Turtas Citycon Shopping centre Vilnius 8,000 Vilniaus Vartai Ranga IV investicijos Baltic Property Trust Office building Vilnius 9,400 Vingės Terminalas Vingės terminalas Verdispar Logistics centre Vilnius 18,300 Total 112,900 Source: KOBA, 2007 In the past, foreign investors have mostly focused on Vilnius. The consequent lack of appropriate investment opportunities has lead to them extending their search to the country’s secondary cities. As a result of the strong competition among investors secondary-city yields are unexpectedly similar to those in the capital. In fact, they cannot differ significantly while the market remains relatively small, anchor tenants are the same, and inter-city distances are quite short. A good example is an investment transaction in Panevėžys, where the modern shopping and entertainment centre Babilonas (27,000 sq. m) was sold to British investment fund Dawnay Day Carpatian Plc through an open tender with a net yield of 7.3%. As the commercial real estate development sector (especially of shopping centres) is relatively active and the number of projects is expected to increase, both in the capital and secondary cities, the number of investment transactions is also expected to rise. Office market The main objects of interest for institutional investors are located in the capital, while the Vilnius office market remains the most active and the largest in volume. However, almost none of the major office buildings owners are willing to sell their properties, because the majority of them are owned by construction and development companies, which need continuing cash flows. In 2006, only a very few investment transactions took place in the office market. A comparatively large office investment transaction was finalised in Vilnius: an office building (9,400 sq. m) in the Vilniaus Vartai multifunctional centre was sold to the Baltic Property Trust investment fund prior to its opening. Other transactions were much smaller. Retail market Having been active for the last several years, the retail market remains dynamic and still has potential for future development. A few large investment deals, such as the acquisition of the Babilonas SC (27,000 sq. m) in Panevėžys, Mandarinas SC (8,000 sq. m) in Vilnius, Deco (5,200 sq. m) in Klaipėda were transacted last year. Several investment transactions were initiated at the end of 2006 and are planned to be completed in 2007. One of them is the newly built and successfully operating Aušra Shopping Centre (5,000 sq. m) in Utena which is proposed to be sold by open tender. Warehouse market The industrial/warehouse market has been gathering pace in recent years. This segment was relatively active in 2006, also experiencing a number of investment transactions. In 2006, both the Dobrovolė logistics centre near Vilnius and the Kaunas Terminal in the Kaunas FEZ were constructed and immediately sold to international investors. In addition to the logistics centres mentioned above, a sale and lease-back transaction was concluded for the Vingės Terminalas (18,300 sq. m) on Minskas road. Several other sale and lease-back transactions were initiated and are planned to be completed in 2007. It is believed that the number of investment transactions will increase in the future as a consequence of the increasing number of industrial/warehouse properties being constructed or converted. The sector saw a number of transactions for further development. These included the sale of older industrial facilities or central-city buildings, e.g. the Vilniaus Vingis industrial, warehousing and office premises (81,000 sq.m) in Vilnius Savanorių Ave. (part of the deal involved a sale and lease-back transaction), the Sanitas industrial complex (2.9 ha) in Kaunas. Hotels Hotels in Lithuania are mainly operated by local companies, which usually own no more than one or two establishments. International hotel chains lease properties which are also mostly locally-owned. As a result of the constantly increasing demand for hotel services and the increase in Lithuanians’ purchasing power, the expansion of the existing international hotel chains as well as the arrival of new ones is an ongoing process which is expected to continue for few years. Normally, international operators prefer to rent rather than buy, and we therefore forecast that developers will build more hotels for leasing. This will naturally increase the number of investment opportunities. 36 Among the major transactions in 2006 that are worth highlighting is the acquisition of two Baltpark hotels (in Vilnius and Klaipėda) by the Reval Hotels chain, thus increasing the number of Reval hotels to 9 in the Baltics. Mikotel acquired the Hotel Panorama, located close to the Vilnius bus station, from Mearias Investments Limited. Sale and Lease-back 2006 showed that commercial property market has turned its attention to sale and lease-back transactions. Sale and lease-back represents a relatively new financing form and is an economically alternative method for raising capital. Such transactions enable a property to be sold and immediately leased back to the seller. Completion of such a transaction enables the seller to utilise the capital in a more productive way. Last year several transactions of this type, such as the Vingės Terminalas, were completed and two companies announced their intention to offer opportunities in 2007. One of the four major grocery chains, Norfa, is proposing to sell a portfolio of supermarkets (75,000 sq. m) with the intention to lease those properties. The SEB Vilniaus Bankas has announced its intention to sell the major part of its properties in the Baltic States, but will stay on as the tenant. Sale and lease-back transactions will attract increasing attention in the future. Chapter 11 SWOT Analysis of the Current Commercial Property Market SWOT analysis is the most common tool in analysing the expected performance of equities. It lists the strong and weak aspects of an investment together with its opportunities and the threats to it. It does not pretend to give an exact answer to the „invest or not invest“ question, but provides a basis to estimate expected yields and risks. Strengths •Demand for high quality properties in attractive locations •Favourable investment environment •The EU and NATO membership •Attractive financing •Well-educated and relatively low-cost labour force Weaknesses •Decreasing yields •High expectations of future values from vendors’ side •Shortage of land for development •Land prices are quite high in Vilnius because of the boom in the residential market •Increasing construction and labour costs •Lack of parking spaces in city centres and close to office buildings Opportunities •Continuing growth of economy and consumer spending power •Stable democratic political climate •Development of western consumer habits •Intensive commercial project development •High potential for particular property development sectors Threats •Increasing inflation •Overpricing of properties by vendors may shift investment flow to other countries with higher yields and market liquidity •Potential decreases in values of overpriced properties may make it difficult to exit the market in the future. This SWOT analysis of the Lithuanian property market depicts the potentials and risks of a typical growing market and compares favourably with other Central and Eastern European countries, which currently are at a more developed stage (e. g. Poland, Hungary and the Czech Republic). 38 Chapter 12 KOBA Market Expectations 12.1. General Remarks Although the Lithuanian commercial property market is still growing actively, it is also showing some signs of maturity. However, the rapid pace of commercial real estate market development is not expected to slow down in the nearest future. 2006 has again seen growth in the retail market, with a trend of developing shopping centres in regional towns and smaller cities. Development in the office market was not so dynamic, but a number of projects were announced for 2007-2008. In terms of yield dynamics, after accession to the EU and NATO the final uncertainties about the future direction of the country and its risk levels were dispelled. This news, in turn, had a very strong impact on the fall of the yield curve from 12% to 7%, and even lower, on prime location properties in recent years. 12.2. Offices Despite most real estate experts believing that the office market had reached its peak after the significant increase in office supply in 2004, we now observe a shortage of modern office space with demand remaining stable, but supply diminishing, especially in Vilnius. The capital of Lithuania is following the experience of western European cities in terms of developing a CBD with modern office buildings, where the majority of international and the larger local companies have their offices. Other Lithuanian cities are still far behind, however, they could be perceived as having more development potential. A number of new projects is due for completion in 2007-2008, and it is felt that there is likely to be a balance between supply and demand by the end of 2007, consequently making rental prices stop rising. We believe that the largest office developments will take place in Vilnius, with some occurring in Klaipėda, however, the other cities are not yet so promising. Market conditions are influenced by tenants’ preferences to move into modern offices and improving working conditions, which become crucial to attract and keep employees in the current labour market. During the last few years, developers have been more interested in residential projects because of their shorter pay-back periods and higher profits. However, in response to increased demand they have initiated office projects, expecting and already asking higher rental prices, mainly determined by the dramatic increases in land prices. 12.3. Retail The larger cities in Lithuania already possess quality shopping and entertainment facilities and many pipeline projects have been announced, which proves that the retail sector is the most progressive in terms of growth and investment opportunities. Impressive growth is forecast for the shopping centre segment, especially in Vilnius and Šiauliai. Additionally, developers have also started a number of shopping centre projects in smaller cities, indicating that the market is ready to absorb the projected supply. With continuing retail demand, rental levels in shopping centres are expected to remain high. However, increasing competition among shopping centres will compel the developers of new projects to pay particular attention to the concept of a centre and its positioning in the market. Increasing consumers’ spending power, changing consumer preferences together with shopping and leisure-time spending habits are encouraging developers to undertake even more new projects. Equally, the demand for attractive investment opportunities from local and international players remains high. 12.4. Warehouses Although the market is experiencing demand for modern industrial/warehouse premises, the new project development process is unfortunately slow, leading to fewer or delays in investment opportunities. A number of projects are awaiting anchor tenants, as this market is especially sensitive to pre-leasing. On the other hand, if tenants are found, construction can be completed very quickly, usually lasting no more than a year. In terms of industrial projects, Lithuania is still attractive for international companies seeking to relocate production, especially in the country’s free economic zones. However, increasing labour costs are making the country less competitive for international production relocation. Conversely, some industrial projects will be developed by local manufacturers moving their production facilities away from central-city locations to the suburbs or even rural areas. Lithuania’s geographic position between the west and the east offers many opportunities for warehouse/ logistic projects, and we therefore believe that this sector has excellent potential. Moreover, the growing retail sector will have an impact on warehouse development because of increased demand for retail goods storage. 12.5. Hotels Owing to the increasing numbers of incoming travellers and hotel guests, the demand for hotel services has risen. Therefore, hotel chains are likely to continue pursuing a growth strategy, which may lead to the sale of existing properties or increased leasing from developers. Market specifics suggest it is very important to differentiate existing demand, which varies seasonally. Currently, seasonal demand for tourist-class hotels is the segment requiring more attention than the business-class sector; therefore we expect the expansion of economy-class hotels. 12.6. Conclusion The active development of the Lithuanian commercial property market continues apace and the expectations of real estate developers remain high. However, the market is becoming more competitive and mature. In addition, the shortage of good investment opportunities is placing even more strain on market conditions. As a result of shopping centre market growth spreading throughout Lithuania, both local and international retailers are expanding their businesses and taking advantage of increasing consumer purchasing power. Development trends for yields in Lithuania are similar to those in other CEE markets, where yields for prime location investment products decreased to 6.5-7.0% or lower, and the Lithuanian commercial property market is following the same path. Lithuanian commercial real estate market yield, combined with the liquidity this market can offer, is the kind of attractive product international investors are seeking, consequently, it is expected that the market will experience more deals in the near future. 40 Chapter 13 Legal Environment Harmonisation of the legislative acts with those of the European Union and the reform of the administrative system in Lithuania has contributed to the protection of ownership, legal occupancy and investments. The transposition of the EU Acquis Communautaire into the Lithuanian legal system has started long before 1 May 2004, the formal day of membership. In the autumn of 2004, Lithuania was the number one country in the entire EU by the scope of transposition of the EU directives. Thus Lithuania’s investment law conforms to the European Union standards, with a new Company Law and the Civil Code that took effect in 2001. The real estate market in Lithuania is regulated following the generally accepted principles of ownership immunity and protection of rights of a just acquirer (possessor). In addition, the principles of equal treatment and equal protection are the main principles of the investment law, meaning that both Lithuanian and foreign investors are subject to equal business conditions, and their rights and lawful interests are equally protected by law. 13.1. General Information Any resident of Lithuania or a foreigner, either an individual or an enterprise, may acquire buildings, flats and other premises in Lithuania. However, there are certain limitations for direct land ownership. On the other hand, any individual or enterprise, either a Lithuanian national or a foreigner, may freely establish an enterprise in Lithuania. Enterprises established in Lithuania notwithstanding who has their effective control are entitled to acquire real estate without any specific restrictions. 13.2. Establishing a Lithuanian Property Company Kinds of Enterprises A company of limited liability is a common legal form in Lithuania (95% of all Lithuanian registered enterprises), particularly used for investment in real estate. Private limited companies with a minimum capital of approx. EUR 2,900 and up to 250 stockholders as well as public limited companies with a minimum capital amount of approx. EUR 43,443 are the two alternatives for companies. The Lithuanian law designated to satisfy private interests has established a number of other legal forms for private ownership and the use of real estate: a personal enterprise, a general partnership and a limited partnership. With the exception of limited partners in a limited partnership, personal enterprises and partnerships are regarded as enterprises with unlimited liability. All registration differences of enterprises of so-called ‘local’ capital and of ‘foreign’ capital have been eliminated. A new integrated Register of Legal Persons has been established for the purpose of accumulating, protecting and providing information on all Lithuanian enterprises and other legal persons. An enterprise is considered to be established only when this enterprise is registered with the Register of Legal Persons. Consequently, any changes of incorporation documents and data of the enterprise are effective only after they are registered with the Register of Legal Persons. The basic information accumulated in the Register of Legal Persons is available on the Internet. Opening and Closing an Enterprise The World Bank Report ‘Doing Business in 2007’ ranks Lithuania the 1st economy in the Eastern Europe and the 16th economy in the world on the ease of doing business. Lithuania maintains uncomplicated market entry procedures for enterprises. Establishing an enterprise is quick and inexpensive. In principle, when the registration process goes smoothly, two weeks is the average time schedule for enterprise registration. The registration time and cost are, naturally, higher for foreign owners, which have to provide certified translations of the paperwork. As far as company exit is concerned, the system is in place and operates fairly well. Lithuanian laws allow for a fairly easy exit of companies from the market through liquidation. An average bankruptcy case lasts for about 1.7 years, which is among the shortest periods in the region. Public Private Partnerships Public Private Partnerships (PPP) projects are still a new practice in Lithuania though Lithuania has a favourable legal environment for PPP projects. The new Civil Code, effective since 2001, introduced the required legal regulations for PPP schemes. The new Concessions Law came into power on 1 October 2003 and improved significantly the possibilities to apply PPP structures for various projects in the public sector involving private capital. According to the law, the areas where PPP can be applied are broad enough, including energy, healthcare, tourism, public services and other sectors. The most popular areas where PPP structure is applied in Lithuania are: energy sector, public services, real estate development, transport and environment. As the Lithuanian public sector is under constant need for investments, and is moving towards the more efficient management of resources and achievement of greater value for money over the longer period of time, the number of PPP projects in Lithuania is expected to increase significantly in the nearest future. 13.3. Investment into Real Estate Acquisition of Land and Buildings Principally, there are no severe limitations to the direct acquisition of buildings and land for development by foreigners. Foreign investors have the right to buy or lease buildings for their commercial activities as well as lease or purchase land plots for the construction of buildings. Rights of foreigners to acquire land in Lithuania are established in the Constitution of Lithuania and regulated by the special Constitutional Law on Implementation of Paragraph 3 of Article 47 of the Constitution. With certain exceptions of the entrails of earth (underground) and nationally significant land areas exclusively belonging to the State, other land, inland waters and forests may be acquired into ownership by foreigners as explained below. The main requirement for foreigners wishing to acquire land in Lithuania is meeting the criteria of origin – citizenship, permanent residency or establishment in a European Union Member State, or a member state of the Organisation for Economic Co-operation and Development (OECD) or of the North Atlantic Treaty Organisation (NATO), or a state which is a party to the European Economic Area Agreement. Certain limitations for acquisition of agricultural land and woodland apply during the seven-year transitional period. During the transitional period only foreign individuals who have been permanently residing and engaged in agricultural activities for at least three years as well as foreign legal persons and other organizations that have established in Lithuania their representative offices or branches will be allowed to acquire agricultural land and woodland. In summary, currently foreigners that are residents in 39 countries around the world are eligible to directly acquire land in Lithuania. Foreigners that do not comply with the established criteria may lease the land plots or use them based on other kinds of contracts. As for buildings, flats, other premises and structures, there are no substantial restrictions imposed by Lithuanian law in relation to acquisition of these types of real estate by Lithuanians or foreigners. 42 It is noteworthy that for the sake of the acquirer, the Lithuanian law establishes the connection between the land and buildings. Pursuant to the Civil Code of Lithuania, if a land plot is subject to acquisition, it is presumed that the buyer also obtains the ownership right to the buildings, constructions and facilities on this plot of land, unless the sale-purchase agreement specifies otherwise. On the other hand, by an agreement on sale-purchase of a building or other real estate, the seller has to transfer to the buyer the rights to the land, on which the building is located. In case the seller of the building is also the owner of the land plot, the seller has to transfer to the buyer either the ownership right to that plot of land or the right of the land lease or development. If the seller does not own the land, on which the sold building is located, the buyer acquires the right to use a respective part of the plot of land under the same conditions as the seller. Privatisation Real estate may also be acquired following the special procedures of privatisation of state and municipal property. Usually, investors in state and municipal property are asked to assume certain contractual obligations, which are mainly contributing to preservation and development of such property. Privatisation may take the form of any of the following: public sale of shares, public auction, public tender, direct negotiations or transfer of control of state or municipality-controlled enterprises. Investors may negotiate settlement for privatised property in instalments and, depending on the form of privatisation and the privatised property, payments may be allocated during the period of one to five years. Under certain conditions, for instance, in case of major investment in the leased state or municipal buildings or premises, such premises may be later privatised according to an agreement on lease with an option to purchase allowing the investor to settle for the real estate during the lease period up to ten years. The latest information about privatisation objects may be found in the Information Bulletin on Privatisation (Informacinis privatizavimo biuletenis). Privatised property is sold by privatisation institutions such as the State Property Fund (in case state property is privatised) or municipal administration (in case municipal property is privatised). Financing Real estate financing is widely available. Foreign and domestic capital providers offer a wide range of real estate financing products, including first and second mortgages, debt financing and other. As a result, longterm financing is generally available in litas, Euros, and US dollars. The Lithuanian financial system has been adequate to support the recent strong economic growth and the businesses have free access to finance. It is noteworthy that borrowing in Lithuania is rather inexpensive. The average interest for bank loans is 5.5%. European Structural Funds European Structural Funds will be one of the main drivers of the Lithuanian economy over the coming years. The funding is dedicated solely to the Lithuanian market; therefore there are certain strict requirements for eligible candidates for funding. The first criterion is that the Structural Funds should be used for projects, which take place solely in Lithuania and create added value for the Lithuanian economy. The applicant for the structural funds should have a legal establishment in Lithuania. However, the origin of the capital of the Lithuanian enterprise, which is applying for financing from the European Structural Funds, is not of a great importance during the evaluation process of the application. This would actually allow foreign investors to establish their businesses and operations in Lithuania and to apply for structural funds for projects, which would take place in Lithuania. Mortgages Real estate mortgages are common collateral on loans issued by Lithuanian banks for acquisition and development of real estate. Real estate owners are free to mortgage their property in order to secure the existing or intended undertakings and obligations arising with respect to land transactions, commercial loans and other. It is noteworthy that the mortgaged property remains with the owner and does not eliminate the owner’s rights to use and dispose of the mortgaged property taking into account the rights of the creditor. Like other real estate transactions, contractual mortgage has to be certified by a notary and registered. Divisions of Mortgages at the local courts are in charge of the registration of mortgages that come into effect upon registration in the Register of Mortgages. It takes three days to register a real estate mortgage. Sale-Purchase Agreements For protection of owner interests, all real estate sale-purchase agreements have to be signed in the presence of a Lithuanian notary public who verifies the agreement for its legality as well as notifies the Real Property Register on the concluded sale-purchase agreement of a particular property. Nevertheless, the buyer for his own sake is responsible for applying to the Real Property Register for registration of the ownership right to the property after the transfer-acceptance of the property takes place. Even if the registration of the change of the owner in the Real Property Register is not mandatory, no further real estate transactions would be possible as long as the registration is not completed. The notary fee depends on the transaction amount and counts as a 0.5 per cent of the price payable for the purchased property. Following the general principles of law, Lithuanian law is always applied to international transactions concerning real estate located in Lithuania. The transfer of real estate has to be documented by a statement of transfer-acceptance that is signed by the buyer and the seller. A notarised agreement on sale-purchase of real estate is binding on the seller and the buyer. However, the sale and purchase of real estate may be invoked against third parties only in the event of being properly registered with the Real Property Register. Real Property Register In the World Bank’s ‘Doing Business in 2007’ report, Lithuania ranks in the third place among the top 10 countries with the most efficient property registration procedures. The Real Property Register contains all actual information on buildings and land plots, rights to real estate and encumbrances thereof. One can receive information from the Real Property Register on changes in real estate, mortgages on buildings or land plots including pledges of land lease rights, imposed attachments, civil cases brought to the court regarding real estate as well as registered agreements or decisions made regarding the legal status of real estate, such as concluded lease agreements and equivalent, regarding any particular piece of property. Real property registration fee depends on the kind of the real estate and its value and varies in a range of up to EUR 2,900. Planning and Development For the purposes of the construction, a plot of land has to be formed according to a detailed plan. A detailed plan should also be prepared in case of change of the purpose of the land, division or combination of the land plots and in other cases specified by the legislative acts. 44 The organizers of the detailed planning are the directors of the municipal administrations. However, municipalities are allowed to transfer the rights and obligations of the organizer of the detailed planning to the owners or users of the land plot. In a detailed plan, the following requirements for usage and arrangement of the territory have to be established: the general and specific use of the land plot, the maximum height of the buildings, the allowed density and intensity of construction on the land, the territory for construction, the conditions of arranging engineering and communication network and the servitudes, if required. The detailed plans of the territories that do not have engineering infrastructure might be prepared only upon preparation of a special plan for development of the engineering infrastructure. However, the legal acts provide that such special plan might be prepared simultaneously with the detailed plan of the land plot. There are no particular restrictions imposed on the construction activities of foreign enterprises. According to the Law on Construction, both Lithuanian and foreign persons can benefit from construction rights to the extent limited by law. The principal legal requirements include possession of the land on which construction activities are to be undertaken. Land developers thus have to own the land or use the land plot on other legal basis. The second step is to obtain a planning permission for the building. The developer should also be in the possession of a building permit that is issued based on complete architectural plans to comply with the general area development plans. The procedure for issuance of building permits has been simplified and is based on a onestop-shop principle. A building permit can be obtained from the local municipality if the developer submits certain documentation. A building permit is normally granted for a period of ten years. The owner is entitled to use the newly constructed or reconstructed building after it has been commissioned. The next step is to register the building in the Real Property Register. According to the laws, the user of a building has to supervise its condition and perform technical supervisions. The user of the building is obligated to timely repair, reconstruct the building and maintain the surroundings. The municipality is entitled to control how buildings are used. 13.4. Letting of Real Estate Both Lithuanian and foreign nationals and enterprises and may let or lease land and buildings. Real estate and land in particular may also be leased from the state or local municipalities. Any agreement for the letting of real estate is to be concluded in a written form and no further approval by a notary public is required. Such agreement may also be invoked in respect to third parties only upon its registration with the Real Property Register. Upon a change of the landowner, the new owner takes over the rights and obligations of the lessor in accordance with the lease agreement registered with the Real Property Register. With the exception of certain lease conditions specified by law, provisions of the lease of real estate are negotiable. One of the lease conditions regulated by law is that terms of state-owned land leases may not exceed 99 years (25 years for agricultural land) and other real estate may not exceed 100 years. Commercial real estate leases typically have terms of three - five or more years. A lessee, who has duly performed under the terms of a lease agreement, shall be entitled to a pre-emptive right to renew the lease agreement and is entitled to restitution if the lessor has failed to comply. A land lease agreement may be terminated with a two-month minimum notice if the land is not for agricultural purpose, or a three-month notice if the agreement of the agricultural land lease is terminated. An agreement of building lease may be terminated under certain circumstances as established by law and the contract. Rent fee is often denominated in the litas by establishing a firm rate with Euro (LTL 3,4528 to EUR 1) or in Euros if a foreigner is a party to the lease agreement. The quoted rent fee generally does not include utilities and service charges and the value added tax (18%) that are added on the rent fee. Taxation rules provide for cases when parties to a lease agreement may choose to apply the value added tax or not. 13.5. Investment Protection and Guarantees The investor rights and lawful interests are secured by the Law on Investments and other regulations. An investor has the right to manage, use and dispose of the assets he invested in and, upon payment of the taxes prescribed by the laws of Lithuania, to convert the profit into foreign currency and transfer it abroad without any restrictions. Damage inflicted upon the investor by unlawful actions of state or local authorities is compensated according to the procedure established by law. Property is protected from expropriation following the generally accepted principles, i.e. property may only be expropriated in extraordinary circumstances with prompt compensation at the market value. Foreign investors can defend their rights and lawful interests against Lithuania in the courts of Lithuania, international arbitration institutions or other institutions. In case of investment disputes, foreign investors also have the right to directly address the International Centre for Settlement of Investment Disputes. Bilateral agreements on investor protection are already in place with Argentina, Australia, Austria, Belarus, Bulgaria, Belgo-Luxemburg Economic Union, China, the Czech Republic, Denmark, Estonia, Finland, France, Georgia, Germany, Greece, Hashemite Kingdom of Jordan, Hungary, Iceland, Israel, Italy, Kazakhstan, Korea, Kuwait, Latvia, Moldova, Mongolia, the Netherlands, Norway, Poland, Portugal, Romania, the Russian Federation, Serbia and Montenegro, Slovenia, Spain, Sweden, Switzerland, Turkey, the Ukraine, the United Kingdom, the USA, Uzbekistan, Venezuela and Vietnam. The Agreement on Use of Local Currency and the Agreement on Legal Protection for Guaranteed Foreign Investments between the Multilateral Investment Guarantee Agency (MIGA) and Lithuania are in force. 46 Chapter 14 Taxation of Real Estate Lithuania’s tax regime is generally business-friendly. The statutory corporate income tax rate is only 15%1 and is among the lowest in the EU, labour taxation is in line with the similar countries, and the overall tax burden is one of the smallest among the EU countries. The overview provided below focuses on the Lithuanian taxes and their aspects relevant to the real estate owners, lessees and developers and is not aimed at providing a thorough coverage of the Lithuanian taxation framework. There are no taxes on investment in Lithuania. 14.1. General Information In terms of taxation, there is no difference between investments in partnerships and limited liability companies because Lithuanian partnerships are not transparent for tax purposes and, like companies, are subject to corporate income tax. In addition, permanent establishments of foreign enterprises in Lithuania are normally subject to the same tax requirements as other Lithuanian enterprises with certain exceptions (allowed deduction of administrative expenses of the head office, and etc.). A foreign enterprise has a permanent establishment in Lithuania when such enterprise: •Engages in business activity in Lithuania of a permanent nature either itself or via a dependent agent, or •Uses a construction site, an assembly or installation object in Lithuania, or •Operates a natural resource exploration or extraction site. As mentioned previously, the most common enterprise used to invest in Lithuanian real estate is a private limited company, hereinafter referred to as a Lithuanian Property Company. No capital duty is payable on initial or subsequent capital contributions to the statutory capital of a limited liability company. 14.2. Financing of a Lithuanian Property Company Acquisition of real estate in Lithuania might be financed by a mix of a loan and equity or by a loan from a bank, or equity only. In the event bank loans are chosen for financing the real estate acquisition, the interest incurred on the loan financing is generally treated as tax deductible expense, unless subject to thin capitalisation and transfer pricing rules (see below). Since 1 January 2006 a temporary social tax was introduced. The taxable base of social tax is the same as of corporate income tax. In 2006 taxable profit is subject to temporary social tax at a rate of 4% and in 2007 – 3%. 1 Withholding Tax on Interest Payments Interest income derived by the foreign entities is subject to a Lithuanian withholding tax of 10%. It should be noted that under the amended provisions of the Interest & Royalties Directive (amended by the Council Directive 2004/76/EC of 29 April 2004), Lithuania may not levy withholding taxes on payments of interest as well as royalties to the associated EU entities higher than 10% in 2004-2008 and 5% in 2009-2010. In case the international treaties provide for more beneficial tax rates, the latter apply. Lithuania has concluded 43 bilateral treaties on avoidance of double taxation. All the treaties are based on the OECD/UN model agreement and are effective with the following countries: Armenia Georgia Poland Azerbaijan Germany Portugal Austria Great Britain Romania Belarus Greece Russia Belgium Hungary Singapore Bulgaria Iceland Slovakia Canada Ireland Slovenia China Israel Spain Croatia Italy Sweden Czech Republic Kazakhstan Switzerland Denmark Latvia Turkey Estonia Malta Ukraine Finland Moldova USA France Netherlands Uzbekistan Norway Source: Ernst & Young, 2006 Thin Capitalisation Rules Starting from 1 January 2004, the principle of ‘thin capitalisation’ is applied under Lithuanian tax legislation. Following the Lithuanian thin capitalization rules, interest on shareholder and related party loans is deductible, however, interest on controlled debt as well as currency exchange losses on controlled debt are not deductible. A controlled debt exists when there is debt to a controlling lender, and debt to equity ratio exceeds 4:1 (only the exceeding part is treated as controlled debt). The ratio is computed as of the end of the relevant tax year, but the equity does not include the result for that year. A controlling lender is one that controls, directly or indirectly, either more than 50% of the shares of the borrower alone, or more than 10% alone and more than 50% together with related persons. Members of the group of a controlling lender are also controlling lenders. If the borrower can prove that the borrowing occurred under arm’s length conditions, thin capitalisation rules will not be applied. 48 Transfer Pricing Rules Lithuanian legislation provides for an arm’s length principle to be followed in all transactions. The State Tax Authorities have the right to adjust transaction value between associated parties and/or to describe income anew. The following methods are approved by the Ministry of Finance, and could be used for assessing the market price in transaction between associated parties: •Comparable independent prices; •Resale price; •Cost plus; •Profit sharing; •Net margin of the transaction. Lithuanian entities, which (i) under the law submit annual financial accounts and (ii) the sales proceeds of which exceed LTL 10,000,000 (approx. EUR 2,900,000) in the year prior to the year when the transaction with associated parties took place, are obliged to keep documentary evidence regarding the transaction value. The procedures for documentary evidence are similar to OECD transfer pricing guidelines. 14.3. Investment into Real Estate The acquisition of real estate in Lithuania is not subject to real estate transfer tax or any stamp duties. Only ownership registration fees of a maximum of approx. EUR 2,900 are incurred. Value Added Tax (VAT) The transfer of real estate is generally exempt from VAT. In the event a property purchase is executed by VAT-registered persons in Lithuania, the parties may agree that the seller would charge VAT of 18%, i.e. a taxable person has a right of option. Once taken, this option requires to be applied for 24 months to all sales of real estate to purchasers registered for VAT purposes. The law provides for several exceptions when the seller has to charge VAT of 18% in all cases, i.e. sale of buildings and structures before their commissioning or within two years following their commissioning or material improvement (so called ‘new’ buildings). No VAT is payable for the transfer of land unless the land plot is designated for the construction of buildings or is purchased along with ‘new’ buildings on it. In case the Lithuanian Property Company is not a VAT payer at the moment when it is transferred the right to dispose of the assets as owner but gets registered later, the special procedure for VAT deductibility is available. The procedure allows deducting a portion of input VAT, which reduces as the time gap between acquisition and registration extends. However, if the Lithuanian Property Company intends performing both taxable and VAT exempt activities, only a certain percentage of the input VAT incurred upon the acquisition is deductible based on the ratio of taxable sales to all sales (VAT pro-rata computation). The initial VAT deduction should be further adjusted for 10 consecutive years in case of real estate (5-years period applies for movable property). Therefore, a Lithuanian Property Company should consider registering for VAT purposes in Lithuania before acquisition of real estate in order not to trigger non-deductible VAT expenses. The procedures approved by the State Tax Authorities provide for a 15 working days period after a registration request is submitted to receive a VAT registration number. Land Lease Tax Land lease tax is paid by individuals and enterprises leasing land from the state and amounts to 1.5% - 4% of its value per year. The council of the municipality on the territory where state plots of land are used determines the exact rate of the tax. It may also reduce the tax, or provide a relief from tax payment. Land Tax Land tax is paid by landowners. The annual tax rate amounts to 1.5% of the cadastral value of the land. Real Estate Tax on Buildings Since 1 January 2007 Lithuanian and foreign entities owning buildings and structures located in Lithuania are obliged to pay real estate tax at a rate of 0.3% - 1% of the value of buildings and structures. The council of the municipality on the territory where buildings and structures are located determines the exact rate of the tax. Individuals owning buildings and structures located in Lithuania who use them for business or individual activities or have transferred such buildings to legal entities for use for a period longer than 1 month or for an indefinite period are obliged to pay real estate tax, too, however with several exceptions. A concept of the ‘mass assessment’ of the real estate has been introduced in 2006 for evaluation of the tax base for the purposes of the real estate tax on buildings. Mass assessment of the real estate is a process of assessment of the similar real estate, when the common methodology and technology of the data analysis and assessment are used. Upon the completion of the mass assessment only a common assessment report is presented. However, in certain cases a taxpayer can apply for the individual assessment. If the value of the individually assessed real asset differs from the value defined in the course of mass assessment more than 10% the taxpayer is allowed to use the individually determined value for the real estate tax base. Legal entities, as opposed to individuals, have to pay advance instalments on a quarterly basis. Both individuals and legal entities have to file annual real estate tax returns to the State Tax Authorities not later than on 1 February of the next year. 14.4. Letting of Real Estate Corporate Income Tax - Basic Aspects Lithuanian Property Companies and permanent establishments of foreign companies are subject to Lithuanian corporate income tax at a rate of 15%. The tax rate of 13% is enjoyed by entities if their average number of employees does not exceed 10 and income during the financial year does not exceed LTL 500,000 (approximately EUR 145,000). Under the Law on Corporate Income Tax, the taxable income is calculated by subtracting non-taxable income (e.g. after-tax dividends, revenues from revaluation of fixed assets under certain circumstances, payments received from Lithuanian insurance companies within the amount of incurred losses, etc.) from the accounting profit, taking into account disallowed and limited deductions. 50 Corporate income tax base calculation: Profit before tax - Non-taxable income + Non-deductible expenses + Expenses above the allowed limits + Other corporate tax increasing items - Other corporate tax reducing items = Tax base - 15 percent corporate income tax = Profit after tax Deductions are allowed if they are incurred during the usual business activity, provided that documentary evidence is presented. Limited deductions are allowed only if they do not exceed a certain limit and consist of the following: depreciation and amortization, business trips, representation expenses, and similar. Sponsorship expenses reduce taxable profit twice, provided it does not exceed 40% of the taxable profit. Non-deductible amounts include dividends, write-offs, revaluations, penalties, limited deductions in excess, costs incurred outside of the usual business operations or inappropriately documented costs. Losses incurred in transactions with related persons may not be deducted from taxable income if the market price was not applied. Payments to tax havens may be deducted only in case the taxpayer can prove that certain conditions evidencing the economic basis of the transaction were met. Other taxes (e.g. real estate tax, etc.) are also deducted from taxable income. The object of depreciation (amortization) may be a certain unit of assets or a group of identical units. Two depreciation methods are applied for corporate income tax purposes: straight-line and accelerated (applicable only to certain types of assets). The selected depreciation method is applied to all the assets of the same type and may not be changed. The depreciation rates depend on the useful life of the asset and may not exceed the maximum rates. Below please find the table summarizing the depreciation rates of certain groups of assets. Please be aware that the law does not restrict choosing a longer depreciation period for corporate income tax purposes. Depreciation Groups of assets Old (Used) buildings New buildings (i.e. completed or renovated after 1 January 2002) Rate Straight line or declining-balance Rate Straight line or declining-balance Office buildings 15 years Straight line 8 years Straight line or declining-balance Retail industry buildings 15 years Straight line 8 years Straight line or declining-balance Logistics and hotels 15 years Straight line 8 years Straight line or declining-balance Residential buildings 20 years Straight line 20 years Straight line Source: Ernst & Young Land is not depreciated for tax purposes. Losses may only be claimed as tax deductible for Lithuanian corporate income tax. It is thus possible for Lithuanian companies and permanent establishments of foreign investors to carry forward losses for five years. The only exception to this rule is losses incurred as a result of disposal of securities or derivative financial instruments that are calculated separately and may be carried forward for three years by deducting them from the future gains from disposals of securities and/or derivative financial instruments. It is not possible to carry back losses in Lithuania. Entities not resident and not constituting a permanent establishment in Lithuania are subject to Lithuanian corporate income tax at a rate of 10% on rent and lease payments. Temporary Social Tax Since 1 January 2006 a temporary social tax was introduced. The taxable base of social tax is the same as of corporate income tax. In 2006 taxable profit is subject to temporary social tax at the rate of 4% and in 2007 – 3%. Individual Income Tax Income from the lease of real estate located in Lithuania derived by either Lithuanian residents or non-resident individuals is treated as income sourced in Lithuania and taxed at a rate of 15%. On the other hand, if a Lithuanian resident exercises individual activities of real estate lease, income derived from lease is also taxed at a rate of 15%, or 27% if allowable deductions are made. It should be mentioned that the rate of 27% from 1 January 2008 will be reduced to 24%. VAT Letting and leasing of real estate is generally VAT exempt. However, VAT is payable with regard to the provision of accommodation in hotels, motels, and camping sites or in sectors with a similar function and letting or leasing of residential premises for two months or less. VAT also applies to letting of permanently installed equipment as well as lots, garages or other sites for parking or keeping of any kind of vehicles. However, a VAT-registered person has a right of option for charging 18% VAT on the letting or leasing of real estate, which is generally exempt from VAT, but only in the case where the property is let or leased to other VAT-registered persons. Once taken, this option applies for 24 months to all lettings or leases granted by the same VAT payer to all tenants registered for VAT purposes. The VAT payer should inform the State Tax Authorities on this option in accordance with the procedure approved by the State Tax Authorities. Charging VAT on lease of real estate is a normal practice in Lithuania, if leased to a VAT-registered person, and secures input VAT deduction. On the other hand, in the case where the real estate is let or leased to a person, who is not registered for VAT purposes (e.g. individuals), the VAT payer has no right to charge 18% of VAT. Moreover, it should be noted that a Lithuanian Property Company registered as a VAT payer should document a supply of goods and services, including letting or leasing or real estate, with a VAT invoice. A VAT invoice must be issued without delay upon the supply of goods or services; however, in cases of longterm services, i.e. services, which are supplied over a certain continuous period (letting, telecommunications, etc.) as well as in cases of long-term supply of electricity, gas, heating and other types of energy, a VAT invoice 52 may be issued for the whole amount of services rendered or goods supplied throughout the month. A VAT invoice should be issued not later than by the 10th day of the month following the month, during which the services or goods were supplied. The taxable event shall be the moment when the invoice was issued. Tax Incentives Tax incentives are a normal practice in the countries of the Central Europe for attracting foreign investors. Different forms of tax incentives are usually provided: •Reduction of taxable income •Reduction of tax rate •Tax relief for a certain period Activities of Accommodation Establishments Country General incentives Free economic zones Lithuania Application of favourable depreciation methods No land, real estate taxes Municipality has a right to reduce / waive land and real estate taxes No corporate tax for the first 6 years1 50% reduction of corporate tax for the next 10 years1, 2 Extensive 0% VAT application Latvia Estonia Double rate of depreciation of fixed assets with regressive method is allowed for tax purposes 80% reduction of corporate tax or property tax for companies in free economic zones1 Tax losses can be carried within the group Extensive 0% VAT application No special incentives applied Extensive 0% VAT application in free zone and free warehouse Source: Ernst & Young, 2006 In Lithuania, there are two free economic zones – in Klaipėda and Kaunas, where tax incentives apply for local and foreign investors. Klaipėda Free Economic Zone is an area occupying 205 hectares located in a strategic position of the city of Klaipėda (3 km from the port of Klaipėda). The first development stage covers 85 hectares and has all essential infrastructure in place. At present, Kaunas Free Economic Zone is in the process of implementation. Corporate income tax incentives apply for the companies the capital investment of which reached one million euros. 1 Total incentives received by a company may not exceed 65% for small and medium enterprises and 50% for large enterprises of investment capital. 2 14.5. Sale of Real Estate Capital Gains A non-resident company selling real estate in Lithuania is liable for corporate income tax at a rate of 10%. The tax is levied on income without taking expenses into account. Afterwards a non-resident company may apply to the Lithuanian State Tax Authorities for recalculation of tax on capital gains taking into account the acquisition value of the real estate. A Lithuanian Property Company and a permanent establishment of a foreign company are subject to a standard corporate income tax of 15% or 13% and temporary social tax (in 2006 - 4% and in 2007 - 3%) for capital gains on the sale of real estate. Capital gains and losses are calculated by subtracting the acquisition costs and related expenses from sales proceeds. Gain (loss) received from all sources other than transfer of securities and derivative financial instruments are viewed as operating profit or loss. Gain (loss) from transfer of securities and derivative financial instruments constitutes a different tax base, although the tax rate is the same. Capital gains on the sale of shares of the company registered in an European Economic Area (EEA) country or another tax treaty country, however, may be exempt from tax if all the following conditions have been met: •Shares have been held for at least 2 years; •At least 25% of the company’s shares have been held throughout that period. Individual Income Tax In case a piece of real estate was held in ownership for three years after its acquisition, capital gains from the real estate sale are not taxed at all, except in cases when a person engages in individual activities. In other cases the capital gains derived by an individual, either resident or non-resident in Lithuania, from the disposal of the real estate are taxed at a rate of 15%. In case a buyer of the real estate is a Lithuanian enterprise or a permanent establishment of a foreign enterprise, the buyer has to withhold the individual income tax from the total purchase price and transfer it to the state budget. In such a case the seller has the right to apply to the State Tax Authorities for an adjustment of income tax on the property sold, i.e. to have income tax adjusted by deducting the expenses from the proceeds derived. Income tax is adjusted where supporting documents are produced in respect of such expenses. VAT The transfer of real estate is generally exempt from VAT. However, the Lithuanian Law on VAT provides that the sale of ‘new’ buildings and structures or their sections is not exempt from VAT and is taxed at an 18% VAT rate. It is considered that: •A new building or structure is a building or structure prior to its commissioning, also a commissioned building or structure for a period of 24 months following its commissioning or following its material improvement; •A new section of a building or structure is a section of a new building or structure, as well as a newly built section of an old building or structure - for a period of 24 months following its commissioning. 54 However, a VAT-registered person has a right of option for charging 18% VAT on sale of real estate, which is generally exempt from VAT. This option can be enjoyed in the case the property is sold to a VAT-registered person in Lithuania. Once taken, this option requires to be applied for 24 months to all sales of real estate to purchasers registered for VAT purposes. The transfer of land is also generally VAT exempt, unless the land is considered as a land under ‘new’ buildings or aimed for development. The land falling under the above exception is subject to 18% VAT. In case real estate is sold without VAT, the obligation of adjusting the initial VAT deduction should be considered, i.e. VAT deduction must be adjusted in the VAT return by increasing the amount of the VAT payable into the budget accordingly or reducing the VAT amount refundable from the budget by the deducted portion of the input VAT attributable to the period remaining until the end of the time set for adjustment of VAT deduction (i.e. 10 years for real estate). 14.6. Profit Repatriation Taxation of Dividends According to the Law on Companies, dividends can be distributed within one month after the distribution of profit by the General Shareholders’ Meeting. The General Shareholders’ Meeting should be convened within 4 months after the end of a financial year. It is prohibited by the Law to pay dividends in advance. Although cash funds accumulated at the Lithuanian Property Company could be sufficient to repatriate profit to the holding company, under the Law on Companies, dividends can be distributed only if the profit for distribution (after statutory reserves are formed) is positive. Lithuania levies a 15% withholding tax on dividend distributions both to Lithuanian and foreign shareholders. Following participation exemption rules, withholding tax on dividend distributions does not apply if the foreign shareholder holds an investment of more than 10% in the Lithuanian Property Company for at least twelve consecutive months and the profit distributed is taxed at a standard rate of corporate income tax. Withholding tax at a rate of 15% also applies to the dividends received by individuals, residents or nonresidents of Lithuania. The tax should be calculated, withheld and paid to the budget by the Lithuanian Property Company. Liquidation and Return of Capital In the event the enterprise in liquidation transfers assets to its shareholders, this type of distribution is treated as a sale of assets at their market value. Therefore, the shareholder is taxed 15% on the capital gains, which are calculated as the market value of assets less the acquisition value of shares. On the other hand, cash transferred to the shareholders as a result of a decrease in authorised share capital is treated as a distribution of profits, i.e. dividend payment, to the extent when such payment exceeds monetary and non-monetary contributions into a Lithuanian enterprise. Sale of Shares in a Lithuanian Property Company Any disposal of shares of a Lithuanian company by a non-resident individual or a foreign company does not fall within the scope of income sourced in Lithuania and consequently is exempt from taxation under Lithuanian tax legislation. Income tax on a capital gain, derived from the sale of shares by an individual resident of Lithuania is taxed at a rate of 15%, with the exception of (i) shares acquired before 1 January 1999, or (ii) shares held for more than 366 days, if the individual was a minor shareholder (holding not more than 10 % of the corporation’s shares) during three years prior to a tax year when the shares are sold. Since 1 January 2007 capital gains on the transfer of the shares of the company subject to profit or similar tax and established in a state of the European Economic Area or a state that concluded and applies a treaty on the avoidance of double taxation with Lithuania are tax exempt provided that the Lithuanian company transferring shares held more than 25% of shares for not less than 2 years. This amendment to the Lithuanian tax legislation is aimed at stimulating the establishment of holding companies in Lithuania. 14.7. Planning Investment Numerous changes in important areas for commercial real estate investment such as tax frameworks, accounting or real estate law have to some extent already been made or are planned for the near future. Now is the time to plan investment structures and models in light of the new regulations planned, and to determine strategies for the future. However, your attorney and tax advisor should always be consulted on the risks and effects of whatever steps you decide on. 56 KOBA Company Profile Since 1989, KOBA has striven to be a serious, competent and professional real estate consulting company, constantly adjusting to the conditions within an ever-changing market. Today, our organisation is composed of qualified and motivated employees always focused on the needs of our clients. We are organised by business sector ensuring that our employees have a sound general knowledge of the property market to complement an in-depth insight into their specialist field. This enables us to provide added value to our clients, not only as real estate consultants, but also as professional and trustworthy advisers and partners at the strategic level. KOBA was established in Copenhagen in 1989, and opened an office in Vilnius (Lithuania) in June 2000. In 2005, KOBA opened offices in Riga (Latvia) and Warsaw (Poland). KOBA also opened a new office in Kyiv (Ukraine) in 2006. Our being organised by business sectors enables us to operate in all parts of the Baltics and beyond. Investment Acquisition and sales of investment property. Preparation and implementation of buying and selling strategies combined with consulting services. Valuation Maintenance of high professional competence in valuation services related to change of ownership, property financing, accountancy, and expert appraisals. Corporate Services Selling and leasing offices and industrial premises. Locating headquarters for large and small businesses. Retail Real estate services to chains of retail outlets wishing to acquire or sell shops, including strategic consulting services. Letting and sales of retail shops. Hotels Providing market analysis, consultancy and advisory services to local and international hotel property operators, owners and investors. Property Management Various assignments related to property management, including collection of rent, care-taking and maintenance. Research Preparation of newsletters addressing the market situation, preparation of market reports, market analyses, and continued monitoring and evaluation of market conditions. Special Projects Group Complex projects, highest and best use analysis, public company and large corporate projects. Capital Markets Group Structuring, equity and debt financing solutions, complex real estate solutions for financial institutions – banks, insurance companies, pension funds, asset managers, etc. KOBA A/S Nørre Voldgade 11 DK-1358 Copenhagen K Tel. +45 33 114644 Fax +45 33 112092 koba@koba.dk www.koba.dk KOBA UAB Konstitucijos av. 7 LT-09308 Vilnius Tel. +370 5 2487222 Fax +370 5 2487223 koba@koba.lt www.koba.lt KOBA Latvia SIA K.Valdemara iela 21 Riga, LV-1010 Tel. +371 7 333321 Fax +371 7 333322 riga@koba.dk www.koba.lv KOBA Ukraine L.L.C. Turhenivska str. 45- 49 01054 Kyiv, Ukraine Tel. +38 044 5603310 Fax +38 044 5693330 kiev@koba.dk www.koba.dk KOBA Sp.z.o.o. ov@kobapolska.pl www.koba.dk Jurevičius, Balčiūnas & Bartkus Profile Jurevičius, Balčiūnas & Bartkus is a professional law partnership acting as a legal counsel to domestic and foreign, private and public legal entities. The professional law partnership was established under the leadership of four partners: Gintautas Bartkus, a distinguished specialist in private law, former Minister of Justice in the 11th Government of the Republic of Lithuania; Gintaras Balčiūnas, a distinguished litigation expert, former Minister of Justice in the 9th and 10th Governments of the Republic of Lithuania; Raimundas Jurevičius, an experienced international commercial lawyer, and Gytis Kaminskas, a prominent expert in the EU law. In 2006, law professor Valentinas Mikelėnas, former judge of the Supreme Court of Lithuania, joined the professional law partnership. He is one of the most prominent experts in civil law in Lithuania, the expert of civil law well established abroad, the author of a number of scientific articles, handbooks and studies. Advocate Kęstutis Jungevičius, a distinguished real estate law expert experienced both in the legal and management spheres, became a partner of the professional law partnership in 2006, too. Jurevičius, Balčiūnas & Bartkus is a member of Baltic Legal Solutions. Baltic Legal Solutions currently includes Jurevičius, Balčiūnas & Bartkus in Lithuania, Kronbergs & Čukste in Latvia, Teder, Glikman & Partnerid in Estonia and has over 70 practicing lawyers. Through this legal network and through relationships with other outstanding law firms and attorneys, Baltic Legal Solutions is able to serve the needs of every client, no matter in what country his needs may arise or how large the transaction may be. Jurevičius, Balčiūnas & Bartkus is also a member of one of the leading associations of European law firms, the Pinsent Masons Luther Group (PMLG). In total, the association comprises over 360 partners operating out of 33 offices across Europe. Members firms have a strong track-record of collaborative working, with particular synergies in real estate. Services General Practice, Mergers & Acquisitions Law, Corporate Law, Insolvency Law, Distribution Law, Competition Law, Finance & Banking Law, EU Law, Transport Law, Insurance Law, Environment Law, Energy Law, Real Estate Law, Employment Law, Intellectual Property and Information Technology Law, Litigation & Arbitration, Tax Disputes, Lobbying. People The team of Jurevičius, Balčiūnas & Bartkus brings together lawyers with professional experience gained in law firms, audit and consulting firms, Lithuanian Ministry of Justice, the State Tax Inspectorate under the Ministry of Finance, the Supreme Court of Lithuania, the Court of Appeals of Lithuania, other state or municipal institutions. The majority of the lawyers have been trained in foreign law schools, including J. W. Goethe University (Germany), Jean Moulin University, Lion (France), John Marshall Law School (USA), University of the Pacific McGeorge School of Law (USA), Utrecht University (the Netherlands), Lyon Catholic University (France), Riga Graduate School of Law (Latvia), University of Lund (Sweden). The lawyers of Jurevičius, Balčiūnas & Bartkus have broad international experience with the European Commission bodies, European Bank for Reconstruction and Development, Council of Europe. Professional Law Partnership Subačiaus 7 LT-01127 Vilnius, Lithuania Tel. +370 5 274 2400 Fax +370 5 274 2444 E-mail: Advocate@jbblegal.lt www.jbblegal.lt 58 Code 3000 62777 Register of Legal Persons VAT number LT100001278217